In 1909, Harry Gorden Selfridge – the business magnate who founded the Selfridge’s department store in London – coined the term “The customer is always right.”
Yes, that’s right – he’s who you have to blame for that one.
Anyone who has ever owned a business or worked in a face-to-face setting will know how much that saying continues to permeate several industries (especially retail and ecommerce). But those people likely also know that it’s not always the case. Sometimes, the customer is in the wrong and your team’s sales and finance departments are likely the ones responsible for explaining as much.
While it can be thankless work, it’s a key part of your business’ success. And a large part of that customer interaction where the finance department is concerned is Accounts Receivables.
Accounts Receivable invoicing is a key part of a company’s financial structure. Whether you’re on the frontlines of sales, a finance manager or something entirely unrelated, understanding this process – and knowing how to respond to challenges surrounding it – is crucial to your company’s success.
But what happens if this process isn’t clear to you? And what if an element of A/R invoicing causes your company to reduce its cash flow?
Here, we’ll cover everything you need to know about the Accounts Receivable invoicing process – including invoice disputes – and how you can use data to solve A/R invoicing challenges.
An Accounts Receivable invoice is a record of a sale by a customer that has yet to be paid. You can consider an Accounts Receivable invoice to be a “future sale” because, while the customer has indicated that they’ll be completing the purchase, the money from that purchase is not yet with you.
You may be looking into your A/R invoices for any number of reasons, including:
Researching trends in your customers’ spending habits
Investigating a spike or dip in cash flow
Troubleshooting customer issues that have led to invoice disputes
Generally, the Accounts Receivable invoicing process happens one of two ways, depending on the size of the business. Large businesses have automated systems that collect customer data (such as billing information, order information, shipping information if applicable. They also include other details, such as an order number and referral information. which then organizes the “master data” so you can gauge the company’s success and challenges in terms of cash flow. Smaller businesses, or businesses operating on a more bespoke basis, automate less of this process, creating manual A/R invoices for customers.
Understanding and monitoring A/R invoices is a crucial way to understand your company’s financial health. Of course, ideally your A/R data would be nothing but paid invoices, bringing in a seemingly unlimited amount of income to your business. But since that’s not always possible or the reality of the situation, it’s equally important to understand a common element of A/R invoices that’s less positive: invoice disputes.
You might find a customer disputing one of your invoices (and delaying/refusing to pay until it’s resolved) for several reasons. For example, it could be that your customer doesn’t agree with the payment amount listed on the invoice (as it may differ from what has been discussed between both parties). An invoice dispute can also arise if the incorrect quantity of goods is listed and that needs to be resolved before payment can be made. Another common reason a customer might dispute an invoice you submit is that they’re unhappy with the quality of the goods or services delivered to them.
Whatever the reason, a disputed invoice means you won’t be able to collect that payment. So, your cash flow could take a hit as you were probably counting on that income to offset other expenses. And if invoice disputes are for large dollar amounts (that make up a significant portion of your overall revenue), then you could find yourself in even more financial difficulty.
While it’s chasing after invoices is never a fun part of running a business, getting paid is important if you want to grow your business. Unfortunately, invoice disputes happen more often than you realize. The key is understanding why the invoice dispute has occurred, who is at fault for it and what should be done to prevent it from happening again in the future.
The key to making invoice disputes less of a recurring problem is data. How? Let me explain.
If you analyze the data patterns behind your invoice disputes, you can identify why invoice disputes are happening. As you analyze the total number of invoice disputes that have happened in the last 12 months, you’ll want to identify:
The top 3 root causes of your invoice disputes: Were these invoice disputes due to production quality issues from your side? Or perhaps the invoice disputes were happening because of clerical errors being made by your team? Or perhaps the invoice disputes occurred because certain information (i.e. PO number, payment amount) was either wrong or missing from the invoice in the first place? Knowing what the top 3 causes of your invoice disputes is the first step as it can highlight larger problems internally – both in your own company and in your customers’ business.
The top 3 customers who have had more than 3 invoice disputes: While the cause of invoice disputes is certainly important, it’s not the only type of information you need to fix and reduce the number of invoice disputes overall. Are the same five customers disputing your invoices? Or is it randomly occurring across many of your customers? If it’s the former, then it could indicate that certain customers’ Accounts Payable processes may have flaws that are causing the invoice disputes to arise. You would never have been able to identify these patterns if you didn’t analyze the data first.
The specific items being disputed on invoices: On top of identifying which customers are most often disputing your invoices and why they’re doing so, you can also use data to find patterns in which specific items on invoices are being disputes. Are 75% or more of your invoices disputes based on missing information (i.e. PO Number, Invoice Number, Payment/Bank Details)? Or are most of your invoice disputes based on customers questioning the payment amount due? If you can see any patterns in the data, you’ll have a better idea of what needs to be addressed internally.
In a perfect world, the data will point to a problem that can be easily fixed. So, once you fix it, you will hopefully see a considerable decrease in invoice disputes. But as experienced finance managers, you know that things are rarely that simple.
More often than not, mistakes on invoices happen when Accounts Receivables teams are relying on fully manual and outdated processes. One way to fix this is to use software that can give you incredible insights into your customers’ financial health by adding credit risk data to your balance sheet. Not only will this help you prioritize which payments need to be collected, but it will also help you reduce your bad debt. So it’s a win-win, right?
Once you’ve done the initial work of identifying which customers are disputing your invoices, why those disputes are happening and what specific items on your invoices are being disputed, you can then move onto resolving the disputes. We recommend you create some protocols internally to help your team not just fix existing invoice disputes, but to reduce the overall number of invoice disputes each year. This will have the greatest impact on your bottom line.
To help you out, we’ve outlined a few steps that will help your team cut the overall number of disputes significantly.
Generally speaking, you have three options once you’ve reached the final stage of handling the invoice dispute.
You can do any of the following:
Approve all disputed items in the invoice and make the necessary changes to the invoice (i.e. change payment amount, change due date, change order quantity, etc.).
Come to a compromise and agree on only some disputed items in the invoice (i.e. providing a discounted rate or a partial refund, extending payment terms, etc.).
Reject the dispute and insist the customer pays the full amount. This approach will usually involve further escalation, investigation and the use of collection agencies and/or lawyers.
Choose not to continue working with a customer and cancelling the contract. This could include providing a partial or full refund.
Choose to continue to work with a customer but revise the terms of your relationship and contract based on their previous track record of paying your invoices.