One of the dark sides of doing business with some customers, such as big box retailers, is charge backs. It can be a cost of doing business.

I remember back when I was CFO for a pharmaceutical firm and one of our customers was a large pharmaceutical distributor. They were very actively involved in chargebacks. It wasn’t a pleasant task. It was hard work, but in that particular instance we saved the company about $45,000. It was time spent that had a demonstrated return on investment and was time very worthwhile. The pain was worth it.

So here are some suggestions about charge backs:

1. Jump on these quickly. Charge backs can be like a cancer. They can be very infectious and permanent. If they aren’t nipped at the bud, they can become very institutionalized and harder to get rid of. Time does not work in your favor.

2. Keep a listing or log of the types of charge backs that you are getting from a particular customer. Normally, they’ll be a pattern. You’ll see certain chargebacks repeating themselves over and over. By helping keep such a listing, you get the arms around just what is the universe of charge backs that they are trying to come back at you for.

3. Get the information on the charge backs up to the right person in your company. Charge backs are a serious matter. They can turn a profitable account into a very unprofitable one. The sales person or general manager who was very excited about landing a big account, like a big box retailer, might get a very different perspective on the account after seeing the chargebacks. They may very well need to take it up to their peers at their level at the customer. There may need to be some high level discussion saying that we just can’t be doing this anymore and put a brake on certain things.

4. Getting appropriate technical people involved. There might be chargebacks for labeling issues or receipt of merchandise or damaged goods in transit, for example. Get that information over to the right person involved, such as in the shipping department, so they can follow-up with the particular carrier, vendor or other person involved that might have impacted why the chargeback took place.

5. Summarize the overall amount of chargebacks by invoice and kind of keep an overall total. Get a sense on what these chargebacks are doing to your overall profitability here. Understand what kind of landscape you’re getting involved with.

6. Get in contact soon with the customers, particularly in their accounting department. Get clarity on any chargebacks that don’t make sense. Ask them for particular proof. This lets them know that you’re keeping your eye on the ball and not just rolling over and taking the chargebacks for granted.

7. Modify your operating practices as need be. You may need to change some things on your end as you learn about how your new customer is operating.

8. Make a business judgment on the chargebacks. There may be certain ones that you might just have to decide that there’s nothing to do about it, that these are a cost of doing business.

9. Adjust your pricing going forward. Now, that you understand more about how the customer operates, look at how to adjust your pricing to get the kind of margins you were expecting to get on the account. Of course, you can’t do this in a vacuum. You have to obviously consider this in the competitive environment. Depending upon those circumstances, you may or may not have the flexibility to move prices up.

10. Learn from your experience as you prospect and close on other similar accounts in the future. Perhaps, as part of your closing process, bring up the chargeback questions during the discussion. Try to get a feel for as much as you can about the prospective new customer before you begin. Ask about how they handle chargebacks and what types of areas would come up. Perhaps, agree on certain amounts right up front, for example, such as, advertising allowances or other things.

There are so many things to consider on chargebacks. Some of the amounts may be small, but these amounts can grow and if you don’t hold them in check, they could really destroy some of your margins.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value