Magazine article Business Credit

The Bane of Deduction Management

Magazine article Business Credit

The Bane of Deduction Management

Article excerpt

Can you imagine what would happen if you went into a store and, after the cashier rang up your total, you said, "Take $5 off; I am deducting that amount because you were out of my creamer." After stunned silence, your head might be spinning while security guards escort you out against a backdrop of whispers and laughter.

The emergence of administrative handling charges, penalty and compliance claims and fines, is no laughing matter. They are all over the place ranging from $5 to $50 for leaving a PO# off of an invoice or sending a hard copy instead of electronic invoicing. Other charges may include $100 or more because the carrier was late or $5,000 to $15,000 because the UPC scanning code contained errors. The list is endless and growing. Creditors are increasingly hit with any arbitrary value for many arbitrary reasons. The bottom line is that it's hard to manage these deductions.

The deductions come not only from self styled "auditors", but they also surface with policies of executives who cannot be reached on issues of deductions. It is a nightmare with large firms who literally may require dozens of phone calls stretched over months on end, numerous written communications, and hours of time and research to amicably explain and collect just one claim.

Simply put, firms may not set price by policy. These deductions boil down to price advantages and the claimant's processes are a one-way street - a barrier to fair trade. Debtor firms become judge, jury and executioners of these claims, without any due process afforded the creditor firms. Some claimants are even programming their systems to look for date discrepancies between order and delivery times and automatically enter a deduction value against the vendor.

Credit professionals can quickly collect deductions from smaller customers. Their executives are accessible, they do not systemize deductions and holding orders does not necessarily jeopardize the vendor relationship. But, it is hard to collect from large, monopolistic customers. The latter builds an illusory legal defense through their "Vendor Agreements" and/or their announcements and procedures' pamphlets.

Sales representatives generally have to sign vendor agreements with the buyer's firm prior to being granted an audience with the buyer. The agreement may specify that cash discounts will be calculated "off gross". Claims also appear on procedures pamphlets and policy letters that may state that the company will make deductions of so much in dollars, depending on the related problem, be it shipping a back order or a carrier delay. When traced back in detail, a number of claims turn out to have problems originating from the debtors.

The customer's position creates tremendous pressure against sales representatives to ignore a vendor agreement - they will not get an audience with the buyer; or, if they recognize the legal problems, they have to take the agreement to their own legal department to delete all items pertaining to price advantages. This starts the relationship on the wrong foot with the buyer because the buyer has to get approval for the changes to their "standard form" that "everyone else" accepts. Even with the deletions, the buying companies' policies, sooner or later, resurface and deductions are subsequently made, because it is hard in large companies with many policies to monitor the exceptions.

Some sales representatives do not recognize the legal implications and sign the agreements. This, of course, is that the sales representative/seller may only discriminate in prices, even if a competitive price has been presented by the buyer and the seller agrees to meet that competitive price. This criterion has not been met when a vendor agreement has signed prior to an audience being granted with the firm's buyers.

The mailings of announcements and procedure manuals spell out and reinforce policies. These clearly direct the seller on the special compliance procedures required by the customer. …

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