Everyone hates credit memos but no one more than the CFO. CFOs are in a tough spot because they are often the messengers who get tarred for delivering bad news. That’s not fair, since CFOs are generally just reporting the facts, but maybe that’s why most of them are tough in the eyes of everyone – their peers, subordinates and managers.
Credit memos are particularly frustrating both to salespeople and CFOs because your company had the sale booked and then customer returned the product. It’s like in high school when my dream girl accepted my invitation to prom and then reneged when someone cooler and more handsome asked her later. That hurt a lot more than if she’d just turned me down at the start, like I had expected.
Anyway, I’m nearly over that trauma, but your company is still probably writing loads of credit memos every day.
Credits memos suck. You quite literally are decreasing your sales by 100 percent of the value of the return. In addition, there are other costs: first, someone has to take back the product, which may or may not be fit for resale – if not, you lost the sale and have to write down the inventory.
Next, accounting has to process the credit memo, send it to the customer and reconcile any issues that arise over shipping costs, etc. Finally, you may have a frustrated or angry customer on your hands who received the wrong material or was given bad advice on a purchase by one of your employees.
No sale, an inventory write-down and a lost customer – this is the trifecta of credit memo carnage.
Of course, many of your credit memos are just price adjustments. Congratulations: you keep the sale but now have a customer who has “caught you” charging them incorrectly – so you lost gross margin dollars on that order and trained an account not to trust you.
The universal principle of credit memos is that they are always bad for a distributor and usually bad for the customer because it means something went wrong. What should you do about it?
The easy solution is to tighten up your returns policy – and I’ve seen plenty of distributors do that out of frustration because they cannot seem to reduce credit memos any other way. Unfortunately, this approach is akin to attacking a revenue shortfall by asking your customer service people to make outbound sales calls. In both cases, the answer seems logical -- but it doesn’t solve the problem, it aggravates customers and adds stress to your customer-facing employees.
Good news: I have a solution and (like nearly all of my good ideas), I didn’t think of it. Instead of annoying everyone, I suggest you apply Pareto analysis to your credit memos in a structured and ongoing way. To do this, create codes for each type of credit memo you write and then rank them from most frequent to least frequent.
Starting with the most-frequent type of return, do root cause analysis to understand why credits are occurring and then figure out ways of preventing them from happening again. You will be surprised to learn that in the majority of cases, you can take specific action steps to improve your processes, training and customer service to reduce your credit memos dramatically – which not only pleases the CFO but thrills customers, customer service and salespeople as well.
Happy CFO, happy customers, happy employees – this is the trifecta of a good credit memo fix!
When I was a branch manager at Grainger about a hundred years ago, we had a problem with customers returning air compressors. Air compressors have to ship without any oil in them. Even though the oil was tucked away in the (large) box, customers regularly unpacked them, plugged them in and turned them on oil-free, which immediately ruined them.
Customers were mad because they felt duped – everyone plugs in new products when they get them. It’s a reflex reaction. We were mad because we were writing credits for products that customers had wrecked, not us – but we felt we had to protect the relationships. Our supplier was mad because they shipped us perfectly good air compressors and we returned them damaged, asking for credit, which they were highly reluctant to provide. We were all pointing fingers at each other, which (not surprisingly) helped not one bit.
When root cause analysis revealed the problem, we met with the supplier and came up with a solution: the manufacturer started wrapping a long, yellow, very sticky piece of bright yellow tape around the prongs of the plug. It said: ADD OIL BEFORE PLUGGING IN. It took some effort to remove, which was a minor annoyance, of course, but it dramatically reduced our air compressor returns and everyone was much happier.
Our process improvement people did Pareto and root cause analysis across our negative transactions on an ongoing basis, and we all watched as credit memos dropped dramatically over time, pleasing everyone and annoying no one.
So instead of pointing fingers or changing your returns policy, try applying simple tools like Pareto and root cause analysis to your credit memos instead. I think you’ll find it’s a great way to improve your financial returns, your customer satisfaction and your employee morale at the same time.
And you’ll no longer face the disappointment of gaining a sale only to lose it later. In other words, once the girl you ask to prom accepts, she won’t change her mind later. Speaking of whom, I looked up that girl on LinkedIn a few years ago. It turns out she’s now a CFO.