It may seem hard to believe, but accounts receivable has grown at a faster pace than either inventory or sales during the past two and a half decades. Although much of this buildup in A/R has its roots in the increased use of supplier credit by corporate customers, a sizable portion can be attributed to the growth of unresolved customer deductions and invoice disputes. And these claims are taking too long to investigate, process, and collect.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

"Receivables agings have shown that some short payment chargebacks remain outstanding for as long as two years," says commercial credit consultant Frank E. DuBrava, "with unpaid items in many cases being settled at reduced value, allowed, or written off altogether. As these transactions increase in age, the likelihood of collecting the full amount diminishes. No small wonder that more and more corporate attention is being focused on the development of better methods and procedures to reduce the magnitude of customer deductions that are typically tying up capital and increasing the cost of recordkeeping."

• The Claim Cycle. "This usually begins with the cash application process upon receipt of either the customer's check or a lockbox deposit."

• The Cash Application Function. "This requires each of the items on the customer's remittance advice to be checked against the current statement of account. The deductions shown on the customer's remittance advice are checked against credits on the account to determine if, in fact, a claim actually exists," DuBrava says. "If an applicable credit is not located, it is at this point that claims are actually recorded."

• The Claim. "Whether it be a short payment against an invoice," says DuBrava, "or a formal debit memorandum deduction, the claim is recorded on a cash application detail sheet. The various items recorded on the cash sheet (gross total of items removed less any deductions being added back to the account) must equal the amount of the customer's check for balancing purposes."
  As DuBrava notes, it is the responsibility of all cash application personnel to identify and document the claim as thoroughly as possible from the information furnished with the customer's payment. In some instances, very little data may be available, such as in the case of a short payment of an invoice. In others, complete information may be furnished in the form of a formal debit memorandum listing all of the facts supporting the customer's contention that credit is due.

• The Transmittal Deduction Information. "This is communicated by means of a customer deduction notification that is used to list all pertinent data available," DuBrava says. "After completion of the form, the cash application personnel furnish copies along with customer documentation and a copy of the check and remittance advice details to the credit executive. This person has the responsibility for the customer making the deduction, and the credit and collections coordinator, who will begin the investigation of the claim. The cash application center will retain a copy to be used for audit purposes to ensure that proper and timely notifications of claims are being furnished to the necessary personnel."

• Inspecting Customer Files
  1. Invoices to verify pricing, billing procedures, quantities billed, items billed, volume discounts, and promotions.
  2. Shipping documents to determine shipping date, number of cartons shipped, weight of shipment, location to which shipment was made, items back ordered, and freight charges.
  3. Purchase orders to verify items ordered, quantities, prices quoted, billing and shipment instructions, and promotions.
  4. Credit memorandums to compare with customer charges with regard to items credited, quantities, and pricing.
  5. Correspondence for any communications which may have a bearing on deductions made by the customer.

• Inspecting Customer Service Files
  1. Receiving reports to verify customer claims for merchandise returned for credit.
  2. Promotion specifications to determine the validity of customer claims for promotion benefits.
  3. Pending credits to determine whether credit has or is being processed against a specific short payment.
  4. Correspondence from Sales to determine if there are any communications which might have a bearing on deductions made by the customer.

• Inspecting Accounts Receivable Forms and Records
  1. Copies of checks for any notations which might further explain short payments.
  2. Remittance advices for additional details pertaining to deductions such as customer debit memorandum number, date of charge, coding, etc.
  3. Trial balance to determine the accuracy of previous cash applications, and to locate previous deduction of credit memorandums.

• Checking With Other Departments
  1. Sales departments to obtain details of any special agreements with regard to pricing, promotions, and items ordered.
  2. Promotion payment department to determine whether payments were made either internally or externally against customer's promotion claims and to obtain payment details.
  3. Accounting department to investigate credit and debit vouchers and the reasons behind their issuance to customer accounts.
  4. Traffic department to obtain proof of delivery in order to determine exactly what was received by the customer.
  5. Distribution centers and warehouses to obtain information from warehouse personnel relative to short payments where the shipment originated.