Customer Deductions: Impact on Receivables.

Credit and accounts receivable managers are increasingly aware of the money that is tied up in customer short payments and of the time and effort needed to resolve them. In many cases, the work has multiplied to a point where it is disproportionate to the allotted resources available to tackle the problem.

A sizeable portion of the buildup in trade receivables of many organizations is attributed to the growth of unresolved customer deductions. Analysis of accounts receivable ageings has shown that some deductions remain open indefinitely. In fact, a new study done by the Credit Research Foundation (CRF) shows that 45.7 percent of the companies responding have no time limit by which they permit a deduction to remain open or unresolved. Furthermore, compounding the time value of money, lost opportunity of funds and the increasing cost of doing business, most deductions when paid are settled at a reduced value, further deteriorating profits. Perhaps the most significant statistic of this research points out that, after an investigation of deductions, 64.7 percent of the respondents write-off between 71 and 100 percent of the customer short-payments. Astonishingly, nearly 10 percent of the respondents write-off over 95 percent of the deductions.

To further emphasize the dilution of profit, 85.6 percent of the respondents said they have a policy that permits the automatic write-off of customer short-payments. For those 182 companies, the median amount written off without being investigated is $35.00. While this may be a prudent business practice after an analysis of how best to utilize your resources (people and costs associated with deduction management) periodic analysis must be performed to ensure that the policy is still an acceptable practice that fits corporate profit objectives. The study shows that the median across all industries for these write-offs performed without investigation accounts for .01 percent of sales. What is more alarming, however, is that the average, among the total surveyed group of all industries, equals an extraordinary .45 percent of sales.

This study reveals that across all industries, deductions represent 5 percent of accounts receivable open items. Furthermore, these deductions account for over 3 percent of the dollars of open transactions on our respondents' accounts receivable.

This is a major problem, and it continues to grow. One of the hardest hit areas is the producer of goods for the retail environment. As that scene continues to consolidate into fewer and larger "power" retailers, these customers are becoming increasingly aggressive with their deductions. Compounding that is the fact that nearly 40 percent of the respondents claim that between 86 and 95 percent of all deductions are allowed after investigation, which would lead to the conclusion that there are major operational problems in American businesses.

A deduction is the hardest type of open item in accounts receivable to resolve because most departments in your company are involved in various degrees. The customer takes the deduction based on their policy and procedures, and it is up to you to prove they are wrong or right. Since many organizations do not approach deductions analytically, and often react out of confusion, deductions are treated as a distraction to their business rather than viewing them as a warning sign that something within the operation is wrong, then taking the opportunity to fix it. If deductions are viewed as a collection matter only, the company is being neglectful of its customer relationship and responsibility. Grant Thornton, LLP, an international accounting and management-consulting firm, suggests the challenges to successful deduction administration are senior management buy-in, cross-departmental cooperation, lack of resources, timely access to information and inefficient processes.

While the credit and A/R functions are often charged with the responsibility of deduction resolution, it is not within their control to cure the ...