If you’re sending your products to retailers you’re all too familiar with allowances and deductions. And you know the financial impact associated with these terms. But, it gets confusing. You want to be sure you know the difference between retailer deductions and allowances so you can have a clear understanding of when you need to take action.
Deductions vs. Allowances
Whenever an invoice is sent to a retailer, it’s difficult to miss the negatives charges at the bottom of the bill. Quantity discounts and net terms seem to be standing out in red (even if they aren’t) because of the money that appears to have been a loss to no fault of your own.
These credits are called allowances. They are the terms that you and your retailer agree to whenever you become their supplier. Allowances entail that if a retailer does specific actions that are beneficial for you (buy in bulk, pay you by a particular time), then you will do something that is beneficial for them – by taking money off of their order.
But what about the other charges that you receive? The ones that the retailer sends back with the check? Those are called deductions.
What do deductions look like?
You may have recognized them whenever you go to reconcile your purchase order, invoice, and payment together. These deductions are the line items that seemingly outnumber the few positive amounts.
Invoice 478971: $456.00
Adjustment code 22: -$22.53
Adjustment code 54: -$120.34
Invoice: 590729: $790.53
Adjustment Code 25: $790.53
Invoice: 908190: $592.01
Adjustment Code 51: -$23.89
The retailer sends you a deduction whenever they record something wrong with your order when it is received. Based off a list that is typically held in your retailer’s EDI 820 specs (check out Walmart’s, for example), these deductions can seemingly penalize you for anything.
What do the adjustment codes mean?
These adjustment codes are a signal that something is wrong in your supply chain. For example, if you are receiving an abnormally high volume of the adjustment code 27 for Walmart, that could mean that you need to reexamine your carton’s quality and see if it’s time for an upgrade.
Your retailer manages deductions after receiving the invoice. Allowances are terms that are sent with your invoice because of what you and your retailer had agreed to when you became their supplier.
Deductions signify that something has gone awry and needs improvement, while allowances are the sign of your business at work.
It can be intimidating, but with the right knowledge, you can correct your supply chain and possibly even get some money back for invalid errors.