CHAPTER 5

Handling Deduction
Issues

After reading this chapter you will be able to

• Evaluate the unearned discounts and unauthorized

deduction problem at your company

• Work with customers to eliminate the discount/deduction

problems

• Work internally to minimize the problem

• Recommend techniques that will keep the problem at bay

N
ot only do credit and collection professionals have to worry
about collecting their company’s money,they also have to
be concerned about collecting all of it.The two largest
causes for short payment —and credit professionals’ migraines—are
unearned discounts and unauthorized deductions.

What Is an Unearned Discount?

 ESSENTIALS of Credit, Collections, and Accounts Receivable

Many companies offer a small discount for those customers who pay
their invoices early. Typically, a company selling on open account
will offer 2/10 net 30.This gives customers the right to pay the full
invoice amount 30 days after receiving the goods. However, if the
payment is made after ten days, the customer can pay 98% of the
invoice, thus

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saving 2%.While this may not seem like a big deal,it adds up and
works out to a rate of return in excess of 36%.
The problem occurs, over and over again, when the customer
takes the discount and then doesn’t pay within the discount period.
Now, if we were only talking about a few extra days, most companies
would probably ignore the issue. However, unfortunately, a few extra
days is rarely the problem. Many customers take the discount and pay
at 30 or 35 or 45 days—or even longer.

What Is an Unauthorized Deduction?

Unearned deductions cause even more headaches for credit and
collection professionals than unearned discounts. At least with the
discount issue it is fairly easy to calculate and analyze the
problem.Unauthorized deductions are reductions customers make on
their invoices for any one of dozens of valid or invalid reasons,
including:

• Short shipment
• Damaged goods
• Missing documentation
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• Not following retailers shipping instructions

• Freight charges
• Insurances charges
• Advertising allowances
• Rebates

Why Have Unauthorized Deductions Become Such an Issue?

The best customers send along the remittance advice that explains
what the deductions are for.However,many accounting systems do
not have the capabilities to provide adequate detail or the customers
don’t see the necessity of sending along the backup
information.When the accounts receivable manager receives the
payment,he or she then has to apply the payment. Since the payment
doesn’t match any of the outstanding invoices,the accounts receivable
professional then has a problem applying cash.

Selling to Retailers
While unauthorized deductions have become a problem for most
manufacturers, those selling to retailers appear to be hit the hardest.
The problem has gotten so bad that there have been several
newspaper articles

IN THE REAL WORLD

Outsourcing Deduction
 ESSENTIALS of Credit, Collections, and Accounts Receivable

Management Companies
Credit professionals looking for help dealing with their deduction
problems can contact one of the three organizations listed below. All
work to collect unauthorized deductions and unearned discounts for
their clients. The companies are:

Pyramid Group: 513-791-5535; www.pyramidgroup.com

Internal Audit Bureau: 717-689-0590; www.iabinc.com

Creditek: 201-952-0404; www.credditek.com

Additionally, there is some software on the market that helps credit and
collection professionals deal with deductions. It should be noted that
this software is not inexpensive.

Software

• GETPAID 800-395-9996; www.getpaid.com

• I-many Deduction Management System 800-949-1229;

www.imany.com

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Team-Fly®
in publications such as the Wall Street Journal and the New York
Times about the extent of the problem.We should be clear to point out
that not all retailers fall into the unreasonable category when it comes
to taking unauthorized deductions. Needless to say, the sources in
most of the articles are anonymous. However, they came from
enough different sources for the newspapers to give credence to the
stories.Some of the demands being made by a few retailers are:

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 Handling Deduction Issues

• Sellers were asked to give cash back to the retailer or

make other concessions to improve the retailers’ bottom

line. • Payments were delayed with no notice being

given to the supplier.

• Sellers were asked to give back money because their

products did not produce the anticipated sales.

TIPS &T ECHNIQUES

Ways to Eliminate
Deduction Problems
• Ignore the first offense, send a warning with the second,
and after that, bill back amounts and handle as any other
invoice.

• Implement improved procedures for customer returns and

make sure all customers are aware of both the new and
existing procedures for returns.

• Personally visit the worst abusers to determine if there are

any problems that should be resolved on your end. If not,
make it clear that the unauthorized deductions and
unearned discounts will not be allowed.
 ESSENTIALS of Credit, Collections, and Accounts Receivable

Dealing with the Deduction Problem

What follows on the next few pages are quick tips from real life credit
and collection professionals.These suggestions came from various
surveys taken by IOMA’s Report on Managing Credit Receivables
and Collections from those who have implemented them in their day-
to-day operations. Many can easily be included in the day-to-day
operations of the credit department and will help ameliorate the
problem.

Eliminate the Problem

In the best of all worlds,unauthorized deductions would be

eliminated. While few credit and collection professionals have
managed to achieve that goal,by aiming at it,some have come
close.When a customer realizes that the credit and collection staff of
its vendor is not going to allow it to take deductions without good
cause, the number of deductions is likely to decrease with the
customer only taking those that it feels it has a reasonable chance of
being accepted.

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 Handling Deduction Issues

TIPS &T ECHNIQUES

General Tips
• Communicate your requirements to customers. To make
this strategy truly effective, sales must be involved in the
discussion.

• Implement a credit memo policy. Use stickers on invoices

asking customers to call instead of just taking a deduction,
which may be unauthorized.

• Put deductions into system for follow-up calls as with any

other late payment.

• Use a third-party collection firm to collect these funds on

your behalf.

General Deduction Advice

The advice regarding the handling of customers who take

unauthorized deductions and unearned discounts willy nilly is broken
into several categories. Some of the suggestions, however, are more
generalized and as such,are grouped together in the accompanying
tips and techniques table.

Preventing Unauthorized Deductions

Of course,the best way to get rid of unwanted deductions is to prevent

them from occurring in the first place.While it may not seem possible

TIPS & TECHNIQUES

Ways to Prevent
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 ESSENTIALS of Credit, Collections, and Accounts Receivable

Deduction Problems
• Educate the sales force to resolve problems before the invoice is

paid.

• If deductions or discounts are not collected, amounts are

deducted from broker and sales budget.

• Make customers aware that unauthorized deductions and

unearned discounts will not be allowed. When they realize you

mean business, a good portion will stop taking them. • The

first time an unearned discount is taken, send a letter explaining
the problem. Include a statement advising that if future
unauthorized or unearned discounts are taken, the entire

discount program will be placed in jeopardy. • To avoid

unauthorized deductions, verify that the purchase order matches
your terms of sale. If it does not, send it back to the customer for
corrections.

• When starting a policy of disallowing unearned discounts, call

or send a letter. Leave the dollar amount of the discount
outstanding.

to the uninitiated, as you will see from the advice included in Tips &
Techniques “Ways to Prevent Deduction Problems,”there are
techniques that can be used to prevent the customer from taking
deductions it is not entitled to.

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TIPS & TECHNIQUES

Ways to Resolve
Deduction Problems
• As soon as a deduction is made, determine whether the
deduction is valid. If not, immediately send the customer a fax
requesting reimbursement.

• Determine if there is one root cause for a large portion of

deductions. When the reason is identified, it is possible to
resolve the issue.

• Immediately phone the contact to resolve the dispute. If the first

contact person refuses to resolve the matter, move up the ladder.
Most who use this strategy report that going over the head of the
recalcitrant contact changes the mood, and the contact becomes
more cooperative on future encounters.

• Send a follow-up letter and form showing the dollar amount

disallowed, the date of the check, along with a copy of the
postmark on the envelope for each amount. Most customers will
pay on receiving such documentation and stop taking unearned
discounts in the future.

• Set up a customer-complaint system. Customers can call the

customer service department with their complaint. An online
complaint can be e-mailed to the responsible department and

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 ESSENTIALS of Credit, Collections, and Accounts Receivable

handled immediately to the satisfaction of both parties. Credits

can be issued, where appropriate, before the deduction is taken.

Resolving Deduction Issues

Many credit and collection professionals learn the hard way that some
deduction issues are actually the fault of their own company—yes it
does occasionally happen.When this occurs,the effective credit
professional gets involved and resolves the issue.Even if it isn’t your
company, it may be imperative that the credit professional get
involved to get the matter resolved.

Strategies
Rather than take the quick tip approach, some professionals will
prefer to take a more thorough strategy. Some strategies that have
worked for others in the field are:

• Rebill the customer immediately for the deduction. Include a

copy of the group service agreement outlining the deduction
policy with a request for payment within 15 days. If payment
is not received, inform the customer that the agreement will
be canceled.This approach requires backing from senior
management.

• When a new account is set up, send a letter introducing the

credit manager along with a copy of the policies and
procedures. To establish a more personal relationship with the

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customer’s accounts payable manager, follow up with a phone

call.

• Resolve complaints and discrepancies quickly.The sooner the

issues are resolved, the faster the deductions will disappear,
and the customer will learn that you will not tolerate
unauthorized deductions.

• As soon as the deduction is identified, call the customer and

request the backup paperwork. If it is provided, research it
immediately, and get back to the customer. If it is not
furnished, continue

to call the customer to request the information. If all else fails,

have the salesperson request the backup data. • If the volume of

unauthorized deductions is high, assign one staff member to
chase down and collect this money.

• Within 48 hours of receiving a payment with an unauthorized

deduction, advise the customer of the disallowed deduction
and request immediate payment of the amount not approved.

• Implement the 80/20 rule. Reorganize the department so that

one person handles the worst offenders. One credit manager
reports that seven of his customers represent 75% of the
unauthorized deductions. He assigned one staff member to
handle the deductions on those seven accounts.

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 ESSENTIALS of Credit, Collections, and Accounts Receivable

• Empower the billing staff to review and follow-up on short-

paid invoices to free the collections staff to pursue larger
collection problems. Train the billing staff on proper
procedures, including running reports, setting up standard
form letters, and documenting internal systems.

• Those who offer nonstandard terms often find that their

customers calculate discounts incorrectly. Prepare a standard
memo thanking the customer for the prompt payment.Then
inform the customer that the discount was calculated
incorrectly, and show the correct calculation. Not only does
this approach bring in the money for the credit professional
who uses it, but she says it also reduces the number of phone
calls into the credit department.

• Work closely with the sales department.When customers take

unauthorized deductions, force the credit department to work
with sales to resolve the problems.The accounting manager
who takes this approach reports double benefits:Her
receivables aging improved, and the credit department
enhanced its relationship with the sales force.

• Visit recalcitrant customers to explain the company’s policies

regarding unauthorized deductions. This tactic works best if
the company has a clear deduction policy to share with the

customer. • Outsource the function to a third-party

deduction management firm that specializes in this service.

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• Analyze and eliminate the root causes of your deduction

problems.

IN THE REAL WORLD

Credit Pro Guns Down

Unauthorized Deductions
When Remington Arms Company hired credit manager Vicki C. Sharp,
unauthorized deductions were a serious problem especially by the big
chain stores that demand total adherence to their rules. Through a
variety of techniques, she effectively eliminated 90% of the problem.
The unauthorized deductions were averaging 150 days past due and
were out of hand. The function was handled in Delaware and the people
at that location knew they were losing their jobs. Whether it was the
knowledge of their impending job loss or that they lacked the expertise
to handle the job is not clear. They simply had no incentive to resolve
the deductions.

Sharp says she started from scratch, bringing the operation to North
Carolina. She hired new people and trained them. The number of claims
that had not been researched was high. The company also brought in
temporary workers to try to get the workload under control. They even
brought in a third-party firm that specializes in collection of
unauthorized deductions for about six months.

IN THE REAL WORLD CONTINUED

However, the company’s long-term goal was to have their own people
handle the work.

Sharp does not intend to let the problem get out of hand again. She says
the best defense is to be a good detective and do it the way the chain
stores demand. This means that as soon as she receives a check with a

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 ESSENTIALS of Credit, Collections, and Accounts Receivable

deduction, she goes into action. The item is immediately researched

and a determination is made to see if the company complied with the
customer’s guidelines. If Remington is in the right, she immediately
drafts a denial letter and backs it up with all the documentation. This
includes a copy of the customer’s check. This gives them everything
they need. With this approach, Remington generally gets 90% of its
claims paid back.

Occasionally, even after providing all this documentation, the customer

still does not repay the deduction. If the dollars warrant it, Sharp visits
the customer, bringing along all the unpaid claims with the
documentation. She sits and visits with them and reviews the material.
Typically, she only has to do this once and then has a friend for life.
Afterward, if she has another problem with that company, she always
calls the person she visited with—even if they no longer have
responsibility for the deductions.

She recommends that credit professionals be good and timely

detectives. Research the deduction immediately and get rid of it. If
another department is responsible, work with that department. When
dealing with the chains, this can mean getting shipping to move a label
from the right side of the box to the left. She says that occasionally
other departments cannot change the way they are handling the issue.
Then she sits down with the chain and tries to negotiate with the chain
over the issue. Sometimes she gets a deviation and sometimes she
doesn’t—but she always tries.

Many reading these suggestions will think that they involve too
much effort given the amount of the deduction.On one level,they are
correct. However, the goal is not only to collect money for the
unauthorized deduction, but to change customers’ behavior. If they
know you will chase the money,they may stop taking the deductions
After all, the customer must do a lot of work as well.

Summary

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Deductions are a serious dilemma for the credit and collection

professional.The problem shows no signs of abating.The best one can
probably hope for is to try and keep the issue under control.This
requires constant and steady effort and attention. Without that, the
problem will mushroom, taking all a company’s profits with it.

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