Six Lessons on Chargeback Management

Authors: Sreeja Pillai | Asst. General Manager - FAO at Aditya Birla Minacs
 Jeffrey Knopman | Cofounder and Principal at Profit Solutions Group Inc., an Aditya Birla Minacs Partner


WHY IS CHARGEBACK RECOVERY CRUCIAL IN TODAY'S ECONOMY??

Chargebacks and deductions are short pays that a customer withholds from the total payment due to the supplier, quite often for no fault of the supplier. They are a matter of significant concern, particularly for CFO's in the consumer product industries, such as apparel, food, home furnishings, consumer electronics, pharmaceuticals, health and beauty, etc.

Chargeback Recovery: Key Points for Better Management.

Chargeback recoveries are a structured and disciplined initiative to record, track, and recover the short pays taken by the customer. The recovery process typically involves the collaboration of multiple cross-functional teams within the supplier's corporate structure, such as customer sales, account management, accounting, logistics and production. The success ratio of converting a chargeback into a recovery requires persistent efforts and a close coordination among these teams.

LESSON #1: KEEP THEM CURRENT

Timing is extremely critical in disputing claims. It is imperative that disputes are issued back to the customer as quickly as possible. Also, the chances of reversing the chargeback increases dramatically. It can be as easy as responding with a simple email thanking the customer for the payment and stating on record that there is an unauthorized or erroneous deduction that you'd like to investigate and reconsider.

LESSON #2: TRACK AND VALIDATE EVERY DEDUCTION

Like all business transactions, there are supporting documents and audit trails for every invoice payment and deduction. Often tracking the right documents in a timely manner remains the biggest challenge, particularly when the underlying process to maintain the documents for quick retrieval is missing. As soon as a check remittance is received and posted, and a short payment appears, the chargeback team needs to research the backup documents and validate if the deduction is correct. Most customers today have placed strict time constraints on disputing a chargeback.

LESSON #3: FIND WHAT'S HIDDEN

Monitor the accounts receivable (AR) aging report on a regular basis. Large sums locked up in receivables can cripple the business as they remain uncollected for months and may have to be written off. As per industry estimates 25 to 30% of all chargebacks deducted by customers may be unauthorized and erroneous, but certainly recoverable. Unless they are correctly posted and accounted for, they could portray a misleading picture of a company's financial well-being. At the same time, the impact on cash flow management can be significant when the invoices are paid short and gross margins are negatively impacted.

LESSON #4: INVEST IN TECHNOLOGY

Often companies fall behind the curve on business intelligence (BI) technology investments. New age workflow and document management system (DMS) tools allow smarter distribution of work and help identify bottlenecks. Reliance on paper-based processing can slow down the process, increasing the risk of missed recoveries. To manage chargebacks effectively, review the order-to-cash cycle for each sales transaction so that line-level tracking at claim and invoice level is possible leading to smoother transaction closure. A manual process can become a major bottleneck, leading to lost opportunities, lower profitability, and significant financial under-performance. Several key features of Business Intelligence tools allow companies to measure and evaluate the profitability relationship with their customers in real time as well as merchandise performance, production metrics and cash flow management.

LESSON #5: KEEP AN EYE ON THE DASHBOARD

Devise timely reporting and monitoring mechanisms to track progress. This will also put in a sense of urgency in processing teams to ensure that timelines are adhered to. Chargebacks could be of various types including freight and handling charges, terms of payment, short shipments, advertising and markdown allowance claims. Define appropriate reason codes and conduct regular analysis of the top 5 reasons for deductions measured in dollars and occurrence rates.

LESSON #6: GET THE PRO'S IN

Devise timely reporting and monitoring mechanisms to track progress. This will also put in a sense of urgency in processing teams to ensure that timelines are adhered to. Chargebacks could be of various types including freight and handling charges, terms of payment, short shipments, advertising and markdown allowance claims. Define appropriate reason codes and conduct regular analysis of the top 5 reasons for deductions measured in dollars and occurrence rates.


It is not worthwhile investing one's time in learning all the tricks from personal experience. Seek the help of professionals who have done this for other companies and use the opportunity to learn from their experiences. They can help identify all the dollars locked up in chargebacks, define a process to immediately identify invalid deductions, design a process to interact with the customers to discuss these issues and help set up a robust system to recover the invalid chargebacks.

The chargeback process is indeed a major headache for many CFO's and an opportunity to plug profit leakages. Many companies still manage chargebacks manually and in a broken process that is time-consuming, inefficient and prone to errors/leakages. It is definitely worthwhile to review the current DSO (Days Sales Outstanding) and look at monies locked up in unauthorized chargebacks and deductions.

There could potentially be millions of dollars that need urgent attention as they remain uncollected. Chargebacks and deductions can be detrimental to the financial performance of suppliers as they can wash away the profits! Stop the ongoing dilution and become smarter in chargeback/deduction management.


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Financing Through Factoring? Don't Let Chargebacks and Deductions Affect Your Dilution Rate

Authors: Keith Alphonso | Director of Business Development at Aditya Birla Minacs
 Jeffrey Knopman | Cofounder and Principal at Profit Solutions Group Inc.


If you are financing your business by Factoring, you had better factor in the possibility of being hit by chargebacks and deductions issued by major retailers, specialty stores and catalogues.

WHAT IS FACTORING?

So what IS factoring? Well, it’s been around for quite some time—4,000 years to be precise. Legend has it that it is the brainchild of King Hammurabi of Mesopotamia, credited with having established the world’s first metropolis, Babylon. Factoring can be defined as a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (the Factor) at a discount.

A typical factoring transaction is when a Factor advances funds to a Seller based on accounts receivable. The amount advanced could vary and is typically between 70–85% of the purchase price of the invoices, with the balance being paid, net of the Factor's commission and other charges, upon collection.

MINIMIZE CHARGEBACKS AND DEDUCTIONS TO REDUCE FACTORING RISK

All Factors manage their risk by, among other things, assessing the dilution rate of the seller of the invoices. Simply stated, the dilution rate is the loss associated with the collection of the accounts receivable. The dilution rate is comprised of chargebacks/deductions such as returns, damages, markdown allowances, compliance infractions, trade allowances, slow pay, bad debt and other negative issues.

To ensure a reliable cash flow, it is therefore important that chargebacks and deductions are constantly monitored and kept at a minimum. Factors should feel confident of being able to recover their funds when they provide you, the Seller, an advance.

While legitimate or authorized chargebacks can be easily taken into consideration when planning cash flow, unauthorized or erroneous chargebacks issued by retailers could be very damaging. Given that 25 to 30% of all chargebacks issued by major retailers, specialty stores and catalogues are either unauthorized or erroneous; this needs to be taken seriously.

In order to survive in this tenuous economy and garner a true understanding of the modern dynamics of deductions, it is imperative to re-evaluate the internal organizational structure of the order to cash cycle. One also needs to have the same meticulous focus and attention to detail as one would with merchandising, sourcing, production, etc.

It helps to be aware of some of the top compliance deduction reasons including concealed shortages, freight and routing errors, early/late deliveries, EDI violations and carton shortages. Every deduction, whether alleged or valid, has a history. This point is critical when disputing or accepting deductions. Furthermore, retailers have been known on occasion to be “in error” when assessing chargebacks against their suppliers.

MASTER THE FUNDAMENTALS IN DEDUCTION MANAGEMENT

The end game is to reduce the draconian flow of deductions, reduce days sales outstanding and turn a reactive environment into a proactive one. Companies can and should at least pay strict attention to the basics. Just like in football, where success is based on mastering the fundamentals such as BLOCKING, TACKLING, RUNNING and CATCHING, there are fundamentals in deduction management that must be mastered as well.

We have come a long way from the time of King Hammurabi. Let’s do him proud by mastering the deduction management process to ensure that the factor/client relationship is greatly enhanced by both the reduction in the dilution rate and the increase in cash flow.




How the Grinch Stole Christmas... From Suppliers: The Chargebacks and Deductions Nightmare

Authors: Keith Alphonso | Director of Business Development at Aditya Birla Minacs
 Jeffrey Knopman | Cofounder and Principal at Profit Solutions Group Inc.


It's the season to be jolly and there is no reason to be sorry if you know how to save your money from the...Grinch. Like the story of how the Grinch stole Christmas, chargebacks and deductions can be a similarly harrowing experience for consumer products suppliers.

UNAUTHORIZED DEDUCTIONS AND CHARGEBACKS ADD UP

But is the deductions issue fictitious? Is there really a problem? There sure is! Quite like the loss of water dripping from a faulty faucet, chargebacks and deductions that are unauthorized or not agreed to by a supplier, reduce the amount they get paid on their invoices - for no fault of theirs. It is always a challenge trying to keep up with a retailer's list of compliances. When looking at a single deduction made by a retailer, it may not seem like a lot and quite often it is ignored. However, when deductions are added up at the end of the year it can significantly impact the bottom line. The problem is with unauthorized deductions or chargebacks that are not legitimate. Chargebacks could be of various types including freight and handling charges, terms of payment, short shipments, advertising and markdown allowance claims.

Our experience has shown that 25 to 30% of all chargebacks issued by major retailers, specialty stores and catalogues are either unauthorized or erroneous. Yet, only about 20% of these deductions are on average recovered from retailers, with the overwhelming balance being written off. Tens of millions of dollars are therefore being left uncollected!

Chargebacks and deductions affect manufacturers and suppliers across a wide spectrum of industries, including consumer product manufacturers, pharmaceutical companies and the apparel industry. In short, any manufacturer or supplier dealing with retailers has a chargeback problem. A problem that they may sometimes be unaware of.

RETAILERS CREATING A NEW PROFIT CENTER - AT THE EXPENSE OF SUPPLIERS?

With the changing paradigms of the retail industry, suppliers are now dealing with a limited pool of retailers and the "rules of engagement" have changed dramatically. Retailers have created a new "profit center." Suppliers to a larger extent can now no longer ship bulk to distribution centers. Shipments need to be floor-ready. In the apparel industry, suppliers are now tasked with a multitude of responsibilities such as hangers, labels, ASN notices, packing goods for individual branches and many other new demands expected from them and driven by the retailers' new found leverage. All one has to do is pick up a routing guide/compliance manual and the message is conveyed loud and clear: "We dare you to ship correctly!"

Chargebacks and deductions play a significant role in the financial performance of suppliers as they siphon away profits. It is therefore imperative to re-evaluate the way deductions are handled and apply the same meticulous focus and attention to detail that is given to merchandising, sourcing, production, marketing and sales, to garner a true understanding of the modern dynamics of deductions.

Don't wait for a change of heart a top Mount Crumpit! Be proactive and enjoy the holidays!

For more information and details call Profit Solutions Group, Inc. at (212) 779-0907. Profit Solutions Group, Inc. is located at 1120 Avenue of the Americas, 4th Floor, New York, NY 10036