Page 146 - Accounting Best Practices

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7–7 Write Off Small Balances with No Approval
different price for various volume levels a customer orders—perhaps $1 per unit
if 1,000 units are ordered and $2 if only 500 units are ordered. The situation can
become even more complicated if there are special deals in place, such as an
extra 10 percent discount if an order is placed within a special time period, such
as the last week of the month. When all of these variations are included in the
pricing structure (and some companies have even more complicated systems), it
is a wonder that the order entry staff ever manages to issue a correct product
price! A special circumstance under which pricing becomes nearly impossible to
calculate is when the order entry department of an acquired company is merged
with that of the buying company, leaving the order entry people with the pricing
systems of the purchased company, as well as that of their own. This situation can
quickly result in bedlam. The inevitable result is that customers will frequently
disagree with the pricing on the invoices they receive and will not pay for them
without a long period of dissension regarding the correct price. Alternatively,
they will pay the price they think is the correct one, resulting in arguments over
the remainder. In either case, the collections staff must become involved.
The best practice that resolves this situation is a simplification of the pricing
structure. The easiest pricing structure to target is one that allows only one price
to any customer for each product, with no special discounts of any kind. By using
this system, not only does the collections staff have a much easier time, but so
does the order entry staff—there is no need for them to make complicated calcu-
lations to arrive at a product price. However, there are two main implementation
barriers to this approach: the sales staff and customers. The sales staff may be
used to using a blizzard of promotional discounts to move product and may also
have a long tradition of using volume discounts as a tool for shipping greater vol-
ume. Similarly, customers may be used to the same situation, especially those
that benefit from the current tangle of pricing deals. To work through these barri-
ers, it is critical for the controller to clearly communicate to senior management
the reasons why a complicated pricing structure causes problems for the collec-
tions and order entry staffs. The end result is usually a political tug-of-war
between the sales manager and controller; whoever wins is the one with the most
political muscle in the organization.
Thus, simplifying the pricing structure is one of the most obvious ways to
reduce the difficulty of collections, but it can be very difficult to implement
because of resistance from the sales staff. One must build a clear case in favor of
pricing simplification and present it well before the concept can become a reality.

Cost: Installation time:

7–7 WRITE OFF SMALL BALANCES WITH NO APPROVAL
The typical procedure for writing off a bad debt is for a collections person to
write up a bad debt approval form, including an explanation of why an account