Payment deduction are one of top annoying issues for a controller when the number and frequent is racking up, and it becomes an irritating problem when they are passed from person to person within the company without ever reaching resolution. The usual problem is that the initial reviewer passes it along to the person who initially appears to be most likely to resolve the problem, and then forgets that the deduction exists, having merely achieved the short-term goal of removing it from her desk. Then the recipient either passes the issue along to a third person or requests a response from the customer, promptly forgetting about the issue. This constant transfer of responsibility inevitably results in very long deduction resolution periods, annoyed customers, and slow cash flow. This post tries to provide a straight forward best practice to reduce [if not stopping] this constant “transferring and passing by” payment deduction issue.



How? A single person should be assigned responsibility for the deductions of a small group of customers and monitor the status of each open deduction on a daily basis, no matter which person within the company is currently handling resolution issues. By doing so, one can apply constant pressure to deduction resolution, thereby shrinking the number of receivable days outstanding.

How if it is a large deduction problem? An accountant may inherit a large deductions problem where there are hundreds of deductions sitting on the accounts receivable aging!

Comprehensive Solution:

Resolve deductions for the largest-dollar items first, and then work down through the deductions list in declining dollar order. This approach is initially designed to take out of the accounts receivable list the largest deductions; but more importantly, it allows the collections staff to research the reasons why the largest deductions are occurring, and to put a stop to them. As the staff gradually fixes these issues and moves down to small deductions, it can address relatively smaller underlying deduction issues. Thus, this approach is designed to use deduction dollar volume as the criterion for determining the relative importance of fixes needed to resolve problems causing deductions.

The above approach may have the initial reverse result of actually increasing the number of unresolved deductions on the books, since the collections staff is now focusing on the largest and therefore most time-consuming deduction problems. Though a likely outcome, the underlying problem resolutions implemented by the collections team should gradually eliminate source problems, which will dry up the flood of incoming deductions, so the situation will improve a number of months into the future.

Delving into the reasons why deductions occur is the key to reducing the overall number of deductions.

To attack the core problems causing deductions, have the collections staff summarize all deductions on a regular basis and forward this information to management. The management team can then review the data to see what problems are causing the deductions, and correct them. The summary report can be sorted a number of ways: by customer, by dollar volume, by product, by date, and so on. It may be best to issue the report sorted in several formats, since problems hidden within one reporting format are more visible in others. This approach calls for the use of a central deductions database, which can be as simple as an electronic spreadsheet for smaller organizations or a database comprising part of a larger enterprise resources planning system, as is used in large companies.

Deductions management works even better when coupled with a deductions handling procedure. The procedure tends to follow a tiered approach, where very small deductions are not worth the effort of even a single customer contact, and are immediately written off. For larger deductions, a company may require immediate follow-up or only follow-up after the second deduction, or an immediate rebilling— the choice is up to the individual company.

The procedure should include such basic steps, as:

  1. Ensuring that the customer has provided adequate documentation of the problem
  2. Collection of data needed to substantiate or refute the claim
  3. Contacting the customer to obtain missing information
  4. Once collected, reviewing all information to determine a recommended course of action
  5. Depending on the size of the deduction, obtaining necessary approvals
  6. Contacting the customer with resolution information
  7. If approved, entering credit information into the accounting system to clear debit balances representing valid deductions

The main point is to be consistent. The collections staff must be drilled in the use of this procedure, so there is absolutely no question about how to handle a deduction. This will favorably increase departmental efficiency and require less management time to pass judgment on individual deductions problems.