When you are a manufacture a product, you are likely to be working through a distribution network. Those distributors will sell to their network of retailers or dealers. For CPG startups, the benefit of selling through this method has many advantages. It enables you to move large quantities of your product at once and getting it into the hands of popular retailers nationwide.
But it can also have its down sides. What happens when there are customer returns or when products are damaged? Or when the retailer pays before the term of the contract and assumes there is a discount owed because of this? A retailer may automatically deduct these charges from the amount they owe you.
So how does a company ensure they aren’t losing money they are rightfully owed, especially small brands where every penny counts? SKU asked Claire Pelton with Accountfully for some top tips for deduction management to make sure there is more consistency between the amount you invoice and the amount you’re paid.
The Deduction Management Rundown
How important is deduction management, and what is it exactly? Deduction management is a large part of the CPG industry and is so important to cost savings. It’s so important that some larger brands have departments dedicated to it.
In short, deduction management stems from actively reviewing and disputing the charges taken from a distributor or retailer that may or may not be valid. Oftentimes, a retailer assumes they do not need to pay for an item, whether it be for things like spoilage, discounts (that may or may not be valid), early payment discounts, and more. These chargebacks can add up quickly, and many times they are not valid. You, as the manufacturer) , are left with the task of reviewing and disputing said deductions to ensure you aren’t being erroneously charged.
Chargebacks can be based on many factors, but most commonly come from those deductions that are more or less planned for (trade deductions), like allowances for samples and discounts or damaged items. It’s the less common scenarios that can cause the most strife (non-trade deductions), like invoice errors, shortage in shipments, damaged deliveries, etc.
There is a magic window of opportunity to mitigate these charges between reviewing the amount charged and disputing the overages. This diligent review and dispute process can make for significant cost savings and influence future deductions activity between manufacturers, distributors, and retailers when done properly. Unless you are actively reviewing and aggressively disputing any deductions, you may be behind the margin power curve in a sense.
From Planned to less Common Deductions
Deductions can happen as more “planned” items – such as allowances for promotional items, discounts and samples, or the “lesser planned” but more predictable cases, like damaged goods. A large area of deductions are seen as customer returns, which can range from a legitimate return reason, or be the result of a more erroneous reason; mislabeled SKUs (the wrong product sent to a customer), inconsistencies in packaging or higher than normal shipping costs, to name a few.
Whether it falls closer to the planned end of the spectrum or the less predictable end, they still erode margins and require time (and more money) to research. In any of these cases, it is important to be proactive to maximize the cost savings and avoid erroneous deductions before they hit your accounts receivable in the first place.
The five keys to deductions Management Success
To avoid chasing down deductions after the fact, there are a few items to focus on in establishing best practices. We have narrowed down five keys items in successful deductions management program:
- Timing: Most distributors set a limit on how long you have to dispute deductions. If you dispute a deduction outside of this timeframe, it is immediately denied even if the deduction was invalid. Staying up to date on deductions is crucial to success. The time frame is different depending on the distributor, so a good understanding of each distributor’s policy is a good first step. This will ensure you are not wasting money that is owed over lack of initiative.
- Documentation: Bill of Ladings are the most important document when it comes to deductions. If this legal shipping document is not signed by the receiver, there is no legal proof that the product was delivered and the customer can deny payment or claim shortage deductions on the order. Just like entering any other business relationship, proper documentation and signing will keep the relationship legally binding and give you proof that a transaction has been completed.
- Persistence: Distributors bet on manufacturers forgetting about their open disputes or not being willing to stand up for their case. Consistent follow up on open disputes has a significant impact on win rates. Sounds overwhelming, but be the squeaky wheel. After all, it is your money at stake.
- Organization: It’s easy to get overwhelmed with hundreds of small deductions that add up to thousands of dollars in deductions. Having an organized process in place to track even the smallest of these deductions helps with follow up and is imperative to successful win rates with deductions disputes.
- Consistency: Manufacturers who dispute deductions consistently see a significant reduction in their deductions overall. Customers see fewer invalid deductions simply by disputing deductions monthly. The more a distributor gets to know the typical process or areas that need to be accounted for, the more likely they will not make overall deductions on a general basis. Remember that squeaky wheel? It helps here too, to essentially train your distributors in the areas that don’t require deductions.
You can see where having a dedicated team helps a large number of big companies to review, track, and dispute deductions comes into play. Even if you are on the smaller side, having a plan in place to stay on top of deductions can still warrant similar cost savings. If you have more complex sales operations, multiple sales channels, and/or a higher sales volume and velocity, there can be a greater chance for deductions in line with each level of complexity, and therefore a greater chance for losing sight of them. This makes it even more important to stay on top of your deductions management.
Since it also takes the cooperation of multiple points of contact between the company and its distributors to successfully navigate deductions, this can draw out the timing of resolving claims. For the smaller company, this can become an even bigger drain on resources and eat into the bottom line a lot quicker. But the truth is, companies should not ignore the possibility of erroneous deductions being left to eat into that same bottom line without a plan to resolve them.
The solution is to be proactive in mitigating deductions in the first place by being organized and efficient in tracking and having well defined systems in place.
ABOUT CLAIRE PELTON
Claire Pelton leads the marketing team at Accountfully, an outsourced accounting firm specializing in CPG businesses. As an entrepreneur herself, she understands the struggles of being a business owner; especially those related to managing and accounting for inventory. Claire brings simplicity to these common accounting struggles under the guidance of the accounting subject matter experts at Accountfully.
Accountfully‘s services range from basic bookkeeping to advanced CFO-level advisory functions and are designed to be flexible and scale alongside a growing business. Accountfully provides easy-to-understand pro tips designed to help emerging brands better understand and more effectively leverage accounting basics in their daily business practices.