Using Year End Financials to Identify Opportunities
by Robert Prather, President | Deduction Management Services
The first quarter of every year is usually the busiest time for me. Accountants have already come in and completed the Year End Reporting for their clients. Chief Financial Officers and Principles are surprised to find that profits aren’t what they expected them to be due to unexpected write off’s and adjustments made for valid claims and unpaid invoices. Items that should have been identified months ago are just being identified now, invoices that had shown as open are closed without any cash being collected. How did this happen? How does a company that thought they were going to show a profit now show a loss? It’s not as uncommon as you might think.
When I get the call, I’m usually asked to do two things. One, is to confirm that the amount that was written off is truly uncollectable and Two, is to determine why it wasn’t identified sooner and help make sure it doesn’t happen again.
Many times, the write off’s being made for allowances such as Damage Allowance, Co-Op Advertising or Freight are accrued expenses that should have been budgeted for. It’s the items being written off for compliance violations, packing/ticketing errors, unexpected returns and other uncollectable items that surprise management at year end. One thing to understand is, EVEN THOUGH A CLAIM IS VALID, IT DOES NOT MAKE IT UNCOLLECTABLE. There are a huge number of factors that play into whether a company can create value from a valid claim. Having the experience to identify these factors, as well as having a working knowledge on how each Retailer uses these claims, is key.
What is the retailer trying to accomplish with these charges? The standard belief is these claims have become a “profit center” for the retailer and they are taken randomly and without cause. I can tell you from experience that this is not the case. Granted, the retailer is aggressive and many times it can be proved that they have taken the claim in error. However, many times the back-up provided by the retailer supports the claim. Knowing what to do at this point can be the difference between taking a 100% hit to your profitability or creating value that can have immediate as well as long term benefits.
What I find to be a common issue causing unexpected write offs at year end, is the lack of training and day to day procedures within the A/R Department. One example of this is how often I find that invoices showing as open on an A/R Aging for a company like Amazon.com were actually paid on a $0 check that never got posted. Amazon.com usually receives allowances for Damages, Freight and Co-Op Advertising. These allowances are calculated as a percentage of each invoice and are accrued for. Most Retailers will wait for invoices to accumulate to point where a check can be released with a dollar value of at least $1. Amazon.com does not. They routinely cut checks for $0 using all or part of earned allowances to offset invoices. If a company is not looking for these $0 payments, they can have their A/R Aging overstate open invoices, while understating their allowed write offs.
Proper Training and the implementation of best practice SOP’s will help a company quickly and accurately identify valid claims, open invoices and create recovery opportunities can have a HUGE impact on your profitability.
If you have any further questions or would like to inquire about available services, you can reach me at firstname.lastname@example.org or 626 736-3588. We are a Nationwide firm with the ability to help companies increase profitability via increased recoveries, employee training, SOP implementation and root cause solutions.