CRF Survey: Unapproved Deductions Erode Sales by 3%
Excerpts from Credit Research Foundation study: Customer Deductions; Impact on Receivables.
Roughly 3% of accounts receivable are unapproved customer deductions, according to new information released by the Credit Research Foundation (CRF, Bethesda, MD). Further, 5% of open items in accounts receivable are short payments. * Companies that sell to retailers have the most serious deduction problems.
Together, these represent a worrisome erosion of sales at many companies especially those operating on slim margins. This troubling information, which CRF publishes in its study Customer Deductions: Impact on Receivables, is partly a product of the time and expense required to address deduction problems.
Observes CRF: ''While credit and A/R managers are increasingly aware of the money tied up in customer deductions, they are also aware 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 resources available to tackle the problem."
One way to alleviate this problem of tying up your staff to work on only 8% of the total A/R is to outsource this portion of the A/R to a reliable, reputable, results oriented company. Information that CRF deems perhaps the most significant statistics of this project illustrates this point. "Our investigation of deductions," CRF says, "shows that 64.7% of respondents write-off between 71% and 100% of the customer deductions. Astonishingly, nearly 10% of respondents write-off over 95% of the short payments."
How to Keep Customer Deductions From Eroding A/R & Corporate Profits
PROFIT EROSION:
In analyzing corporate profitability and how to enhance the bottom line, here's an area to take a look at: unauthorized deductions in your trade receivables. Many companies believe that customers are improving their own bottom line at the expense of their suppliers. True, some of these deductions are legitimate but an ever-increasing abuse can cause leakage in corporate profits. Fortunately, companies are using some successful tactics to fix the problem.
MOST SHORT PAYMENTS WRITTEN OFF:
Unresolved customer deductions are responsible for the increase in trade receivables at many companies. Adding to this problem is the fact that many companies have no time frame for getting these items off their books.
The CRF study reveals that 45.7% of the respondents fall into this group. Of course, some of these deductions are eventually paid back, but there is still a detrimental effect on the supplier's bottom line. The lost use of the funds and the cost of resolving the dispute erode corporate profits. However, the reality is that these deductions are rarely paid back for the full amount. In fact, 64.7% of the respondents write off between 71% and 100% of customer short payments, while "astonishingly, nearly 10% write off over 95% of the deductions," says the study. To help recover this lost money, companies are looking at outsourcing firms that specialize in the recovery of lost revenue.
Here are some of the specific ways companies use to tackle the unauthorized deduction problem:
- deduction management software is implemented, including Web-based systems for easier communications with customers;
- service fees are charged for unauthorized deductions
changes are made to more quickly issue credits for returns, marketing funds due, pricing allowances, and anything else identifiable, in advance;
PORTFOLIO APPROACH:
Outsourcing allows a company to concentrate on its core business and the reason its customers are there.
Some companies now view their receivables as a major investment and they manage them as an investment portfolio. This is ideal for companies with restricted access to capital. The receivables can be managed so that they make the greatest possible contribution to the company's financial performance.
An outsourcing company is a wonderful way to help a company manage their A/R. Outsourcing has been discovered as a credit and accounts receivable resource. The business of A/R Outsourcing performance is performance driven, not cost driven, and the critical resource in a good A/R Outsourcing company is skilled people.
Revenue Recovery Group Specializes in Account Receivables Outsourcing.
For more information, contact
Revenue Recovery Group
2313 Rocky Point Ct.
San Leandro, CA 95479
Tel. No. (209) 483-2842
Fax No. (415) 962-4073
