Handling disputes and deductions with ease

No aspect of credit management exemplifies the give-and-take nature of your relationship with your customer quite like disputes and deductions. Deductions and disputes can consume a significant amount of your time as a credit manager—from complaints about billing errors to missing items from orders—and without a solid protocol in place, they can leave your credit department overwhelmed.

Why it matters: Deductions and disputes may be a daily occurrence or few and far between, depending on your company’s size, industry and customer base. Regardless of their frequency, it is important that credit departments have an established routine for evaluating these requests. 

“When we get those calls or emails, one thing that we do is ask for the documentation upfront,” said Tim Lane, credit and collections manager at Arcosa Inc. (Norman, OK). “If it’s a tax issue, let’s look at the invoice and see where that tax rate is coming from. If it is a freight or pricing concern, I ask the sales team to send me the latest pricing update so I know exactly what has been communicated to the customer.” 

There are a few key points to keep in mind when diving into the details of a dispute or deduction. “The first question I ask myself is whether or not the request is legitimate,” said Lisa Vaughn, area credit manager for Rogers Group (Oak Ridge, TN). “Was the customer given a price quote and charged more? For tax deductions, do we have an approved exemption? In cases of damage on the job site, was it our truck that delivered or one of our subcontractors? If it was us, more documentation is needed, but if it was a subcontractor, the deduction goes to them, not us.” 

You might not have all the answers at first; that’s why a strong, streamlined investigation into a deduction or dispute is a collaborative one. “We’ve been able to build a really close relationship with our sales managers and sales representatives,” Lane said. “They keep us in the loop on pricing updates so that if a customer has a pricing question, we can easily pull up documentation on changes in price and when they went into effect. It’s crucial that credit managers build a strong relationship with their sales team. It’s transformed our office culture, and we have been able to drive down DSO and even keep deductions low because we are in constant communication with our sales team.” 

While the credit department may have to rely on other departments as they investigate the request, it is critical that they stay involved from start to finish. “My team has been trained to know that there is no such thing as not my job,” said Terri Eggebeen, manager of credit and collections for Fechheimer Brothers Company (Cincinnati, OH). “They may not be able to issue the pricing credit or issue any credit, but what they can do is oversee the process until the end to make sure it is resolved in a timely fashion and stay on top of the matter to make sure that customer satisfaction is met.”  

It’s helpful to establish a threshold for how much can be written off as bad debt. Whether you automatically write off a deduction under five dollars or make the conscious decision not to push back on longstanding, strong customers over meager requests, it all comes down to understanding whether the time consumed by an investigation outweighs the potential money saved by denying a request.  

“When the request is cents on a dollar, just write it off,” Lane said. “If it is something we’ve already accounted for and can easily absorb and write off, it’s much easier to do so. I have a threshold of $20 and anything below that I typically write off. However, if it’s a repeat issue with the same customer deducting the same amount, it is time to do some research.”  

For many credit managers, it is easier to handle disputes than deductions because the timeline is different. “With disputes we are being told before an invoice becomes due or even past due,” Eggebeen said. “With deductions we’re kind of lost and treading water trying to figure it out. To me, a dispute is something I know ahead of time and can alleviate before the due date. A deduction is something I don’t know ahead of time and allows that invoice to become past due because I’m finding out at time of payment.” 

The best approach to managing disputes and deductions is a proactive one. “We start reaching out to customers within seven days, even if it’s just with a friendly reminder,” Eggebeen said. “We are sending the statement over and saying ‘Hey, you skipped this invoice, is there a problem?’ before we receive a request for a deduction or a dispute. We’re asking fact-finding questions before it becomes an issue.” 

The bottom line: Regardless of how often your department receives disputes or deductions, it is important that you develop a streamlined investigation protocol to address these requests, while understanding that, at times, the cost of pushing back against such complaints can outweigh the amount lost by conceding.