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Thresholds for Automatic Settlement of Customer Deductions

Introduction

For customer payments, many companies allow short-payments from customers to automatically settle outstanding invoices, assuming they do not exceed a pre-established threshold.  They have justified this threshold as the funds which may be recovered my lowering or eliminating the short-payment have been more than offset by the additional costs required to administer collection.  Based on a review of how short-payments are typically resolved, if in the overwhelming percentage of cases they are resolved in the customers’ favor, unless there is sufficient benefit to a root cause analysis to improve underlying work processes, establishing a meaningful threshold is probably a very good idea.

iPollingTM Results Review

Recently a Peeriosity iPollingTM question was created to better understand how prevalent tolerance thresholds are for customer deductions, and when thresholds are utilized, the relative dollar amount that is used.  The results indicate that 94% of member companies have implemented and are using a tolerance threshold that allows for short-payments from suppliers to automatically settle outstanding invoices without intervention or special approval, with the remaining 6% of member companies in the process of implementing tolerance thresholds. 

The actual amount of the threshold varies, with 80% setting an amount at or below $50 USD, and half of those in the range of $21 to $50 USD. An additional 13% have a threshold between $51 and $100, with 7% having a much higher threshold.

Here are some of the comments from responding companies that provides insight to the approachs member companies take to these types of transactions:

  • A/R specialists have the authority to write off up to $50 for short pays.
  • 1% or $50.00 whichever is less is our threshold on posting payments with short payments.
  •  $5.00 is our threshold.
  •  Currently building capability to allow threshold to be reduced.
  •  Note that some companies cannot use only one threshold because of the diversity in business and products. You may need one plant at $25 and another at $125 due to the price of the products. Companies also can treat discounts differently than invoice deductions due to price or quality. There are options to use different amounts for each of those or bring grace days in for discounted term customers.
  •  Tolerance varies, but is in the $20 range.
  •  Level will vary by country. The functionality exists, but it has not been implemented globally yet.
  •  Our tolerance is not to exceed $30 USD.
  •  Our threshold tolerance levels are slightly different within the various lines of service due to the size and volume of accounts.
  • Varies depending on segment and customer type.

Closing Summary

Large multi-billion-dollar companies aren’t immune from the daily challenges and questions about how to fine-tune their processes to make them better.  Many times, the issues are the same as those faced by companies with a smaller scale; however, for larger companies, because of the volume of transactions, the impact of even a modest change can be significant. Being able to quickly identify the details for how leading peers approach similar challenges is a real advantage for making the types of changes that will create the greatest impact. 

What threshold is in place at your company to support automatic processing for customer deductions?   What analysis was completed to determine the amount of the threshold and how often is the tolerance amount reviewed?

Who are your peers and how are you collaborating with them?

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Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity, click here



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