Large firms take a position of power when it comes to paying vendor invoices. They make deductions just about everywhere. Here are some key points to consider.
According to a recent study by US Bank, nearly 82 percent of all startups fail due to poor cash flow management. Sometimes, it’s not even the fault of the accounting department. Instead, cash flow problems are often the result of large clients taking their time to scrutinize and pay invoices. This rings especially true for business-to-business (B2B) companies that supply the big guys; mass merchants like supermarkets, the US government, department store retailers, drug store chains, and more.
Hiccups also occur when large firms find ways they can make “deductions” from their vendor invoices. The problem is not limited to startups and SMEs. In fact, firms of all sizes are increasingly finding themselves at a disadvantage when supplying big corporates. Not only can names like Walmart or Burger King take months to settle invoices, but when suppliers do eventually get paid, it’s often less than the amount the invoice called for. In an article that appeared in Business Credit magazine, Robert Wirengard writes:
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 anecdote sounds silly, but it’s actually what happens with corporate invoices. Compliance claims and fines are everywhere in B2B invoicing. Wirengard says debtors can claim $5 to $50 for leaving a PO number off of an invoice or sending a hard copy instead of an electronic one. Other charges can conceivably include $100 or more if the carrier was late, or $5,000 to $15,000 if the UPC scanning code for a consumer good contains errors.
The list is growing and creditors are increasingly seeing arbitrary deductions for vague reasons. It’s difficult to manage these deductions, and debtors know it. With this in mind, and in no particular order, here some key points that all business owners need to keep in mind about “deduction claims” from their clients.
- It affects nearly every B2B firm
Studies show that 5 to 15 percent of all invoices are affected by deductions from clients. This equates to between 4 and 10 percent of all open items on accounts receivable. Essentially, it means if your firm is billing big clients, you’re likely experiencing deduction problems, maybe without even knowing it. Corporates like to use the term “vendor compliance” to justify deductions.
A deduction is the hardest type of open item in accounts receivable to resolve because most departments in your company are involved to various degrees, according to the Credit Research Foundation. The customer takes the deduction based on their policy and procedures, and it’s up to you to prove they are wrong or right.
- Most deductions are valid
While the statistics for invalid deductions warrant investigation from creditors, 85 to 90 percent of them are in fact valid. This means companies must spend considerable time and resources sifting through vendor compliance claims, hunting for the bad apples, which are not easy to spot. Hundreds, sometimes thousands, of transactions must be checked to locate the few that can be returned to the customer with a demand for payment.
- But without scrutiny, revenue will be lost
It’s often tempting to just trust your big-name clients when they say the costs they are deducting are justified. After all, SMEs don’t necessarily have the time or resources to follow up on such things. Or perhaps creditors don’t want to rock the boat, considering they strive to maintain a positive rapport with each of their clients.
However, CRM Software Blog says 14 percent of deductions are usually found to be invalid. Businesses can pull in large sales and profit savings if they address invalid deductions from customers properly. If firms are not able to reconcile these amounts, significant revenue is sure to be lost.
- Invoice remittances may contain 5 to 10 separate deductions
More than 32 percent of financial transactions in the consumer products and goods industry involve deductions, according to the Grocery Manufacturers Association. Some types of deductions retailers commonly take include: costs associated with shipping terms, in-store display allowances, fees related to damaged goods, fees related to price discrepancies, fees related to discontinued products, and more.
Most companies do not approach deductions analytically, says Credit Research Foundation. Instead, deductions are often treated as distractions to the core business, rather than warning signs that something within the operation is wrong.
Companies that operate in the B2B space, and send invoices to large firms, need a fast and systematic way to evaluate “vendor compliance” checkboxes, and resolve deduction claims from their corporate clients.
Experts will tell you that outsourcing the work makes sense. There are a few reliable providers of software and services that can proactively identify root causes and invalid deduction claims for you. Doing this will save you from headaches, but also potentially save your firm hundreds of thousands of dollars in billings each year.