Resolving Disputes and Payment Deductions Quickly Preserves Profits
Don't Let Customer Disputes & Payment Deductions Become a Distraction
Disputes and payment deductions can raise havoc with your revenue, profit and cash flow. They sap your revenue, one small drip at a time. Over time it can become “death by a thousand cuts” and cause significant profit dilution. When selling products or services you expend the full cost of production, then bill at the full price. With disputes and deductions, however, you are being asked to accept less money than you billed, not to mention any resolution costs involved trying to recover the lost revenue.
Substantial volumes of unrecoverable disputes and deductions will greatly reduce your profit and cash flow – possibly even enough to make you unprofitable or at the least to noticeably increase your borrowing costs. This is especially true if you sell to major retailers and/or other firms that take large volumes of deductions for any sort of non-compliance with their vendor agreements.
Before moving on, let’s start defining the problem by making a distinction:
Disputes occur when a customer withholds payment of the entire invoice
Deductions occur when a customer makes a short payment, thereby paying less than the full amount of an invoice
Warning: Low Payback Area
Researching and resolving customer disputes and deductions is generally a low return activity. It requires substantial time to determine if the customer is right or wrong. If they are wrong, significant effort over an extended time is typically required to prove they are wrong and collect the money owed. Furthermore, the longer the time you take to respond to deductions or disputes, the lower the likelihood of making a recovery.
Disputes must be investigated and worked (sooner rather than later) because their value is usually significant and much higher than that of deductions. Deductions are notoriously low return. Furthermore, for most companies, their customer deduction claims will be right 95 percent of the time. The collection rate of the remaining 5 percent is often less than half. As a result, processing deductions can consume huge amounts of time and result in a very low return on the investment.
For Instance . . .
In our experience, a high portion of total deductions can be classified as small balance and immediately written off with no resource and expense dedicated to resolving them. One client raised the threshold to $600. It eliminated the need to research 42 percent of total deductions whose aggregate value was only two percent of total deduction value.
When you consider that only 5 percent of deductions are invalid, this firm was sacrificing the opportunity to recover one-tenth of one percent of total deduction value in return for reducing research volume by over two-fifths. A good trade off.
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When dealing with financial disputes and deductions, it's crucial to have effective strategies in place to resolve these issues promptly and efficiently. This ensures that cash flow remains steady and customer relationships are maintained. Here, we present four best practices for resolving disputes, four more for payment deductions plus three additional ways to keep deductions and disputes under control. By implementing these approaches, companies can navigate the complexities of financial disputes with greater ease and efficiency.
Four Best Practices for Resolving Disputes
Request the customer immediately pay the invoice less the amount disputed. In many cases this will enable you to recover a large portion of the total invoice amount sooner rather than later. If the customer is hesitant to pay, inform them that by sending you a short payment, the burden is now on you to research their dispute and one way or another settle the matter promptly.
Determine if the amount of the dispute merits your attention. Very simply, it is sometimes not worth the time and energy to push back on a customer’s dispute.
Ascertain the nature and specifics of the dispute. A general idea of the problem is not enough. Make sure you get all the details. Request documentation when appropriate.
Research the customer’s claim. If the customer is correct, issue a credit memo and send a copy to the customer. If the customer is incorrect, provide documentation to support your position and request prompt payment. Of course, the customer may not accept your assessment, so make sure you can support the facts. Reaching an amiable conclusion may require several go arounds.
Four Best Practices for Resolving Deductions
Screen out small value deductions which are uneconomic to research and resolve. This requires implementing an “Automatic Small Balance Write-off,” and is a cost of doing business. Remember, recovery diminishes with time, so you don’t want your open deduction volume to be more than your organization can quickly address.
Ascertain the nature and specifics of the deduction. The customer will often include reasons/reason codes with their remittance advice. Larger organizations with automated remittance processing systems use these codes to drive an automated resolution process
Research the customer’s claim. If the customer is correct, issue a credit memo. If the customer is incorrect, provide documentation to support your position, convince the customer, and request prompt payment. Of course, this step may be difficult and require several iterations
Monitor deductions by customer over time. If a customer is a high volume abuser of small deductions, that needs to be addressed with the principals, and can be a justification for raising that customer’s prices.
Three More Ways to Lessen the Burden
If you have a significant volume of disputes and deductions, or if the volume is steadily increasing, you have to address the issue. The steps listed above, executed with streamlined processes and supported by easy access to information and documents, will enable you to manage the cost and maximize the return on your efforts.
There are other actions that can be taken to increase the efficiency and effectiveness of this task:
Fix the Root Causes of Recurring Deduction Issues. Identify the high frequency causes of disputes and deductions. You will find that most are self-inflicted. Correct the causes and you will see a reduction in the volume. One client discovered that their most frequent cause of deductions was billing incorrect sales tax. They acquired a leading sales tax application and saw sales tax deductions decrease by 84 percent within six months.
Automate Disputes and Deduction Resolution. Most collection software has some dispute workflow capabilities. For higher volume situations there are dedicated deduction solutions available in the market, and building AI solutions is getting easier than ever. Automated remittance processing solutions can also address deductions. Sometimes, it is a simple matter to write an algorithm that recognizes specific deductions situations, such as sales tax or freight, and that can then generate an adjustment or flag the issue for manual follow up.
Negotiate a Price Allowance to Avoid Specific Types of Deductions. Shortages can be an issue for bulk shippers. For example, you might offer a 0.5 percent price reduction to cover product shortages in return for the customer not taking shortage deductions of less than 5 percent. Any adjustments should be based on historical experiences.
Time Is Money . . .
The American Productivity & Quality Center (APQC), a non-profit organization providing independent, unbiased, and validated research has accumulated data from over 1,700 companies on the time it take to make billing adjustments, as well as the cycle time from issuance of an invoice until receipt of payment. At the 25th percentile, it takes just 7 days to correct an invoice and only 16 days from invoice to payment. However, at the 75th percentile, adjustments take 20 days while the bill-to-payment cycle time jumps 35 days. The biggest factor in the difference in payment time (21 more days) is the 13 additional days — nearly twice as long — it takes to process an adjustment.
These metrics speak volumes about the importance of both invoice accuracy and the need for responsiveness in regard to customer disputes and deductions. Bill promptly, invoice accurately, and respond quickly to disputes and deductions and you will get paid sooner rather than later or not at all.