Living with deductions: management and prevention.(selected topic)

Deductions are a plague for many credit departments, and it's not just for companies that sell to the major retailers. Any company that has a complex pricing structure or has problems with order fulfillment will incur numerous deductions. The challenge of effectively managing deductions is dominated by economics: in Genpact's 25 years of deduction processing experience for many of the top suppliers to the retail industry, over 95% of deductions are settled in favor of the customer. So the key question is: How much do you want to spend to process adjustments for deductions? The easy answer is less than the amount of invalid deductions collected from customers. However, there are two additional hard-to-quantify factors to consider:

1. If you rarely challenge deductions, customers may become bolder in taking them.

2. If deductions are not promptly cleared from the receivables ledger, you risk overstatement of revenue, profit and assets, while understating promotional expense. In the Sarbanes-Oxley era, this is a serious risk.

So what's a credit manager to do? The answer is the Three Objectives of Deduction Management:

1. Process deductions cost efficiently.

2. Maximize collection of invalid deductions.

3. Work within your firm to reduce the number of deductions incurred.