California Apparel News

Manufacturers who do business with mid-sized to large retailers have learned to expect charge-backs. For a company experienced in shipping to major retailers, chargebacks can be just an added cost of working with large companies. But companies that don’t anticipate and prepare for charge-backs can be hit with unexpected—and potentially crippling—expenses long after orders are taken.

quot;Charge-backs are a way of life in the apparel industry—everyone has them,” said Robert Prather, president of A/R Management Services, a full-service charge-back and accounts receivable outsourcing/consulting company in LaVerne, Calif. “However, you can control the volume and create a way to use the information they contain to make your company more profitable.” The California Apparel News recently caught up with Prather to find out what companies can do to reduce— or even eliminate—chargebacks.

Can a company avoid chargebacks altogether?

If they could, I’d be out of business! But really, the simple answer is no.

There really are only two types of charge-backs—those you can avoid and those you can’t. And ultimately, there are only two types of resolutions—you either collect it or you don’t. The trick is to try and limit the time and resources spent on dealing with them.

Most people look at the chargeback issue and say: “If it’s valid, adjust it. If it’s not valid, collect it.” But it’s worth taking a closer look at the issue.

If the charge-back is valid, ask why. What area in the company created it? Can you fix it so you don’t get these types of charge-backs anymore? If you can’t fix it, can you work with the customer to get an exemption or work around it in the future? And once you fix it, will the customer work with you to give you some of the money back—even though you were wrong? Is there a way you can streamline your systems to match/write off charge-backs you are expecting without having to spend additional time on them?

A great way to do this is, when possible, to initiate a return allowance for your customer in lieu of having to issue return authorizations, process the return and match the credit to the charge-back. The percentage given should be in line with the customer’s historic return rate vs. sales. This will save a great deal of time.

If it’s not valid, do you have the documentation necessary to prove the item is invalid? Are you following up on items aggressively enough? Are you on the phone enough, or are you relying on letters to try and recover items?

What is the first step a company should take to get charge-backs under control?

Create a system in which charge-backs that are expected (returns, discounts, authorized allowances, etc.) are identified and adjusted immediately; you eliminate the need to constantly address them, look at them and explain them. They clog up your reports, misrepresent collectable totals and suck up your time.

Have a computer system that allows you to enter, track and work charge-backs by customer and reason. Do not file or work your charge-backs by month. Work your charge-backs by customer and reason. This way you can discover trends and address recurring problems or issues in one piece of correspondence instead of many.

Document everything. Allowances should have authorization numbers, and the customer should have to be required to reference this authorization number. Authorization numbers should be tracked to avoid duplication. There should be CCs (carbon copies) to the charge-back department on any extensions for shipping or any change to an order via e-mail or fax. Nothing should be verbal. If possible, all changes should be in the customer file attached to the purchase order.

Who should follow-up on charge-backs?

Hire an expert. A good chargeback person will cost you, but if they are really good, it will be one of the best investments your company will make. A good charge-back person should at least triple their salary in recoveries. A great one will do exponentially more. And that does not include the savings they bring by increasing profits as a result of identifying and eliminating reasons that cause charge-backs. This person should spend most of their time researching, fixing and collecting the charge-back. If possible, your charge-back person should not be making copies, requesting proofs of delivery or pulling research documents such as purchase orders and bills of lading.

You’d be better off paying one good charge-back person and one good clerk to assist them than you would by paying for two mediocre charge-back people. This is one of the few positions in a company that you can gauge a person’s effectiveness by tracking how much cash they bring in—or how much they saved.

Is it better to follow up on charge-backs with a letter or with phone calls?

Pound the phone. It is our experience that although in most cases written correspondence is necessary to initiate a dispute, it is not, however, the way you will collect the most money. You need to have the phone numbers and e-mail addresses of the accounts payable and distribution/ traffic departments of the companies you deal with. One of the biggest problems we find when we go into companies is, a person sends a letter to the customer for repayment and does not call on that letter for over a month. When they do call, the customer claims to never have received the package, so it has to be re-sent, starting the followup process all over again. A rocksolid follow-up procedure will do more for your company than any one thing. If you remember nothing else, remember this.

Once a company has a good charge-back department in place, how can it monitor progress and ensure problems are being fixed?

Have a weekly department meeting. Allow the person responsible for your charge-backs (the charge-back manager or controller) to go over the reasons for chargebacks and discuss with other department heads ways that they can be avoided. Also, since it is usually the charge-back staff that has to access records on a daily basis, they may have suggestions on how to streamline the filing process for easier, time-saving retrieval. Stay on top of suggestions via e-mail and follow through with changes. Track the progress of these changes—are you still getting charge-backs after initiating the changes? It doesn’t have to be a long meeting—one hour on Friday morning with bagels or donuts.

What if a company continues to have problems?

Hire a professional if necessary. For instance, if you are receiving EDI/ASN-type charge-backs and your current staff needs assistance in determining the cause and creating a solution, hire a professional that does this for a living and has a relationship with the major stores in this area. The investment you make in them will pale in comparison to the money they save you.

Also, the reason a department continues to have problems can simply be they are overloaded. Hire a firm that can relieve the overload. Some companies, such as ours, will do this on a contingency fee basis with no added overhead.

Let’s say a charge-back is valid. Do you just write it off and hope it never happens again, or is there any way to recoup your losses?

There are a few ways you can recoup losses resulting from valid charge-backs. One way is to use the charge-backs when negotiating markdown dollars. In many cases, salesmen and owners are negotiating markdowns without the knowledge of what has been charged back already. Gross margin allowances are being calculated and dollars given without taking into account amounts that have been absorbed by the manufacturer already. Giving the owner or sales executive this information can either allow them to reduce the amount being given or negotiate for a settlement of charge-back items remaining open in exchange for authorizing the markdown being requested by the retailer.

By avoiding charge-backs and streamlining time spent on working them, you do two things: lower the dilution and raise profitability, possibly allowing you to negotiate a more preferable factoring rate, as well, and create more time for collections, allowing your staff to focus on items that are recoverable. After all, a sale isn’t complete until it is paid for.