For most businesses, stock credits seem to kill confidence in the stock control system. If your point of sale (POS) uses computer-generated orders, incorrectly handled credits, can lead to unwanted stock-outs. More importantly, the additional labour and time in counting and fixing stocktakes each year adds up. Traditionally credits should account for less than 5% of your total purchases, and if they’re above that rule of thumb, you need to look at the suppliers, the source of the problem in more detail.
Let’s go through a few general principles with stock credits. Overall it’s important to raise a credit and adjust your POS when the credit has occurred. Assume you’re receiving in some stock, you have an invoice for $1,200 for 400 hundred products, and two of them are damaged. What do you do? The supplier has raised an invoice for $1,200 and will expect full payment. So when completing the order in your stock control system, you should recognise the 400 units and original invoice value of $1,200. This keeps the flow of accounting information for later reconciliation. Next, raise a credit for the 2 units that were damaged straight away (2 units x $3 = $6 credit value). Depending on how your system works, it may already have a credit followup and management process. The critical point here is to adjust the stock at the time the credit event occurs, regardless of how the technology works.
Further, it’s important to have a stock credit followup process even if your POS doesn’t have one. For example, you might have a spreadsheet, or you might even go old school and use credit books. Whatever works for you, that’s quick and easy. The keyword is easy because you’re busy, you’re trying to deal with a million different things.
If you’re using a more formal process, you should follow up credits no less than once a week and preferably have a monthly review. Not only that, having a method for tracking the credits allows you to have a discussion with the supplier when you’re trying to negotiate deals or terms. You can pull the stats up and say, “hang on, we’ve got many stock credits. Your delivery quality is not good. I want a further discount.”
More importantly, look at what is the causes of stock credits. Do they fall in line with the good old 80/20 rule in so far as you’re putting 80% effort in for 20% of the results? Make sure your team fully understand the procedures for getting credits. Some suppliers have return authority (RA) numbers, and others have online portals. You must be clear about that process to follow for each supplier.
Also, remember here is the cost of processing the credit. In some cases, the cost of actually getting the credit might be higher than the staff time (cost) taken to pursue getting the credit—for example, an $1,100 invoice. If there are 400 items on that, then the average cost per items is $3. If you’re going to spend three hours to get those two items, that’s greater than the cost of the wages to get that credit. Ultimately you need to look at the overall cost versus benefit. The physical time it takes to create it and get the information and secondly, collecting the data. Even if you decide not to apply for a credit, you should still collect that information so that you can apply pressure on the supplier for better service or negotiating terms. One international boutique retailer who ships containers to various places throughout the world has pre-allocated damage or credit in the order. When a retailer orders a hundred units, the supplier gives an additional five as a credit returns policy for breakages and/or to honour warranties.
Consider this model for all suppliers where you get an additional discount or benefit, and you keep the stats on credits and free yourself from the paperwork. The key point is to process credits when they occur and have an effective follow-up. Balance with the 80/20 rule and use the data you’re collecting. If your credit ratio is greater than 5%, you need to have a look at the suppliers terms and overall product margins in more detail. Optimal is 1% or zero. Thank you for your time and attention.