The Downside of Traditional Accounts Receivable Dispute Management Process
What is Dispute Resolution?
Dispute resolution refers to the process of resolving any kind of discrepancy stemming from incompleteness or inaccuracy of billing documents and invoices.
Clients usually refuse to settle payments when there are multiple disputes. Unfortunately, a slow accounts receivable dispute resolution affects the business’ cash flow negatively and could even result in direct financial losses. As such, dispute resolution could also be referred to as the process of resolving disputes between two parties efficiently and effectively to avoid jeopardizing payments owed to a vendor.
What are the Different Kinds of Disputes?
One cannot plan on how to resolve disputes efficiently and quickly without understanding the different kinds of disputes. Here’s a list.
Quality dispute- When the quality of the service or product being billed on an invoice is being questioned.
Pricing dispute- When there is a question on the pricing between the one agreed upon and the one being charged.
Unaccounted product or service dispute- When there are unaccounted services or products
Administrative dispute- When there are incorrect or missing documents.
Double billing dispute- When there is double billing for a delivery, done by mistake.
Aside from the different kinds of disputes, one should also know about deductions in the ARs. Deductions happen because of different reasons such as delay in shipments, damaged products, errors in billing, among others.
How does the Traditional Dispute Management Process Work?
The traditional dispute resolution process is time- consuming as it involves redundant and manual paperwork. Plus, it tends to be full of errors. Here’s how it works.
Step 1: Receipt of the Cases under Dispute
The analyst takes the dispute tickets or case provided by either the company’s account department or a client
Step 2: Logging and Tagging
The analyst records the disputes in the company’s tracking system, and tags each case or ticket according to their importance depending on the dispute reason code.
Step 3: Aggregating Data
The analyst gathers all the pertinent information to identify the right persons involved for the invoice under dispute.
The analyst then manually pulls out all relevant information and documents such as order invoice, Proof of Delivery (POD), sales invoice, Bill of Lading (BoL), tax receipt, and other related documents. The analyst then proceeds to study the filed dispute at a superficial level.
Step 4: Requesting Additional Data
When there are missing documents, the analyst gets in touch with the customer to request additional information so the dispute can be resolved quickly.
Step 5: Resolving the Dispute
After obtaining all the related documents, the analyst then proceeds to research for the basis and validity of the filed dispute so he or she can determine the best way of dealing with the disputed item. In particular, the analyst will study whether the dispute should either be refunded, collected, or written-off.
Step 6: Requesting for Further Clarification or Action
The analyst will communicate with the client if he or she finds that the dispute is invalid. The analyst either informs the client of the dispute’s invalidity or seeks additional clarification or a withdrawal of the filed dispute.
Step 7: Seeking Approval
If the analyst deems that the dispute is valid, then he or she will proceed to get the nod of his or her superior. It’s another step that prevents the timely resolution of the dispute and is another task that involves manual paperwork.
Step 8: Issuance of Credit Memo or Debit Memo
The analyst will get in touch with the client to inform that the company will issue either a debit memo or credit memo if the superiors approve the validity of the dispute.
The analyst will also inform the accounts department and request to update the invoice status in the ERP. The account status will be closed once the changes have been reflected in the system.
Step 9: Generating Reports
Manual reports will be generated for the use of executives and managers who will study the deduction functions. Report generation tends to be full of errors and time-consuming when there is no centralized real-time data.
What Are the Challenges of Using the Traditional Dispute Management Process?
The traditional dispute management for accounts receivable is complex as it involves manual processes, which costs companies too many resources. Here are the challenges of traditional dispute management.
Time-consuming- Gathering data and records to validate a dispute takes many hours. According to research, roughly 15 to 20 percent of disputes are invalid, and yet they eat up a large percentage of the analyst’s work time.
Costly- Resolving multiple dispute cases means having many analysts verify the validity of each dispute. This means many labor hours and even additional costs to be borne by the business, and more importantly, writing-off unresolved disputes.
Fragmented operations- Traditional dispute resolution involves multiple departments just to trace the source of the dispute. A fragmented workflow process usually prevents a seamless inter-team collaboration, which in turn delays the resolution of the disputes.
Operational inefficiency- Usually the dispute resolution management process isn’t standardized and the legacy ERPs have limited capabilities, which is why the traditional AR dispute management requires many labor hours.