The collections and receivables company 9ci hosted a webinar today on preventing and managing invoice deductions. Having spent many years in the trenches helping my clients overcome their receivables challenges, I know that invoice accuracy and promotional activity are major contributors to short paid invoices, particularly when selling to retailers. Disputes are often the least collectible of outstanding receivables (as much as 95% are disputed transactions are not collected) but they cause the most "noise" and customer service issues.
Customers short pay or dispute invoices for the following reasons:
- Inaccurate invoice – price is wrong, or quantity on invoice does not match quantity shipped.
- Discount terms – customer is eligible for a discount if they pay within a specified time frame. Customer pays later than specified, but takes the discount anyway.
- Freight – customer pays their own freight, but seller mistakenly includes it on the invoice.
- Compliance issues (relevant for some industries) – seller fails to provide shipping notice or include packing slip, resulting in a "fine" levied by the buyer and deducted form the payment
- Promotion/incentive programs – in many industries volume is driven through promotions (two for one, or deep discounts for a limited time period) that often lead to misunderstanding — not only between the sellers sales/marketing departments and accounting team, but also between the seller, buyer, and intermediaries such as distributors. This wrecks havoc on collections teams.
Yet most credit and collection teams have limited influence over the factors that cause invoice errors. They can't ensure that orders are picked accurately in the warehouse, or that the sales department communicates promotional pricing and timing to distributors in a timely fashion. Thus, fostering collaboration between your receivables team and other departments within your organization is key to resolving disputes.
Jim Torongo, VP Credit at 9ci customer Hartmarx (HMX) shared how his firm successfully reduced invoice deductions from $3.5 million/year (nearly 35,000 transactions per year with customer disputes) to less than $1 million/year. Hartmarx uses 9ci to manage disputes as well as manage collections.
The key is to use workflow to route disputed transactions to various departments for input and use business intelligence tools to track resolution, root causes, and measure results against performance metrics. Tying the bonuses of supervisors in shipping/warehouse departments to quick resolution of disputes is an effective means of promoting shared accountability. Visibility to who is supporting receivables/collections in their effort to reduce disputes and resolve them faster will be of interest to senior management once they realize the amount of money left on the table uncollected.
Research by PayStream Advisors indicates that collectors spend only 20-45% of their time contacting customers to collect funds. The rest of their time is used collecting backup data, doing research, and analyzing disputes. By proactively capturing shipping documentation and customer agreement data (whether electronic via EDI or scanned paper documents) and linking the documentation to invoices collectors can focus on calling customers.
- Article in Business Credit magazine "Prevent What You Can, Manage What You Can't: The Role of Technology in Deductions and Dispute Management"