The Role of Technology in Deductions and Dispute Management

The Holy Grail of accounts receivable (A/R) is generating the perfect invoice. It’s an impossible goal in the absolute sense, but a good standard to aspire to. After all, many deductions and disputes that occupy the bulk of collectors’ time arise from short-pays that are the result of charges that shouldn’t have been on the invoice in the first place. It’s not unusual for as many as 40 percent of all outgoing invoices to be either flat-out wrong or inconsistent with what the customer expects, which can have a major negative effect on a company’s measured days sales outstanding (DSO).

So how do you structure an environment that is a likely breeding ground for the elusive "perfect invoice"? An automated solution can enable A/R departments to take a proactive, rather than reactive, approach to deductions and disputes. This newfound power has the potential to not only improve cash flow, but to enhance and streamline customer relationships. Technology is only a part of the equation—companies also need the right processes and buy-in in place to find the root causes of receivables disputes. They must make sure that staff are trained properly, so that employees in sales and marketing, order entry or inventory know their actions directly impact the validity of future receivables.

"A/R is the final resting place for all process and procedure problems that may exist in the company," says Chuck Kylander, Director of Credit for Louisiana Workers’ Comp. Indeed, bridging the department gap is one of the key benefits of an automated A/R solution that incorporates workflow and business intelligence (BI) features to make sure all departments are on the same page.

Technology solutions today promote and facilitate better internal communication, in addition to providing a means to better understand each customer. This kind of companywide, customer-specific visibility allows A/R to uncover the root cause of disputes and deductions and enables proactive "plans of attack" to address existing receivable issues. Common examples of preventable disputes are pricing errors, freight and tax issues. Regardless of your industry, you could be open to price-related disputes. There are a slew of factors that can cause price related issues, especially in companies where the pricing structure is very complex. Some of these possible issues are:

• Invalid or blanket purchase orders (POs)
• Invoices sent out twice, accidentally
• Invoices sent for the wrong pricing amount, or for the "right" amount, but accompanying a known shortshipped order
• Compliance issues (in applicable industries), such as failure to send an advance shipping notice (ASN) or putting the packing list in the wrong place on the shipping crate
• Discount terms
• Freight: it is not unusual for freight charges to mistakenly appear on an invoice in a case where the customer has actually shipped the goods via their own carrier. Freight gets on the invoice anyway, and the result is a short pay

Simple problems like these can be eliminated by using the proper analysis and monitoring tools. Once again, the goal is to free up A/R staff time to be spent collecting valid cash instead of being inundated with the never-ending dispute resolution process. An automated process can intercept the invoice before it is even generated and identify whether the order is tax exempt or freight exempt.

If the invoice has already gone out, the system will automatically know to deal with the problem when the short-pay comes in, so it doesn’t become a cash application issue. For example, if a customer pays $90 on a $100 invoice, and that $10 discrepancy is the freight they were incorrectly charged, the system can automatically code that short-pay as freight and route it through an automatic approval process. Instead of falling into a collector’s hands, wasting time and jeopardizing customer relationships, the short-pay is identified as freight, and automatically written-off with an audit trail behind it. In short, if you can’t get to the point of generating a perfect invoice, at least the system can be taught to intelligently process the resulting short-pays.

Marketing and trade-related promotions have traditionally been a nightmare for collections. If your A/R and Marketing departments are not using an integrated, centralized, consolidated system such as a trade promotion management tool to handle pricing matrixes and any complex pricing issues that should be flowing onto invoices, you’re asking for trouble. Too often, temporary price reductions or special deals on free goods that salespeople work out with customers are not visible to A/R. This common situation creates massive amounts of extra work for A/R staff trying to communicate back to Sales, and can also put customer relationships at risk by putting a strain on customers’ Accounts Payable and Purchasing departments. This need to align front- and back-office operations with Sales is especially important for companies in the consumer goods and retail industries, where sales promotions are constantly in flux.

For many industries, dispute prevention is only half the battle. Many disputes are preventable, but there will always be those that are not. Generally the latter are sales, marketing or discount- related. Managing these non-preventable disputes properly is arguably as important as circumventing those that are preventable.

A simple example is when a customer pays after the allowed terms date, but short-pays by the discount amount anyway. They may either feel they are entitled to it because of a perceived grace period or they are simply trying to slip the discount through. Systems can be setup to effectively capture that information and automatically challenge the short-pay. If left unchecked, your company could be losing millions of dollars a year with these unearned discounts.

Advertising allowances are another dispute example that often results in unpreventable short-pays. These are a special case — impossible to put on an invoice since they are not related to any specific order — but a centralized system can show that the pending dispute or deduction is going to come through. Special "co-op" advertising allowances, where customers accrue a certain percentage of everything they spend and the funds are stored in "co-op buckets," require the kind of solid visibility that only a shared centralized system can provide. The system will know the amount accrued at any point in time for any customer, marry any short-pay against the co-op allowance, and either submit it for approval or automatically clear the remittance from the customer’s co-op allowance. Thus, the short-pay is never allowed to become a collection issue.

Scan-downs, or instant rebates at the point of sale, are another potential problem for A/R that can be solved with an automated credit solution. In this case, either the customer takes a certain amount off at the point of sale, or—if a distributor is involved—the distributor invoices the customer for the discounted price, but when they pay you, they short-pay for the amount of total scan-downs for the month or quarter. An automated collections system can reconcile this short-pay against the pre-approved deal that was set-up by the sales person.

In summary, a specialized system with a central data repository is necessary so that (1) you can reduce your company’s overall collection effort and (2) if a short-pay does occur, at least A/R can identify it immediately as a valid short-pay or deduction. It’s also important to remember that you can do all you want with dispute prevention; but if your business is not operationally aligned between Sales, Order Entry and A/R, then handling unpreventable deductions will continue to sap valuable time and resources, as well as place customer relationships at risk.

Joshua Burnett is the CEO of 9ci, Inc. 9ci offers a proven, fully integrated, web-based software solution to handle auto cash application, dispute/collections tracking and deduction management, and trade promotion management issues, all complimented by a robust award winning analytics suite.