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Credit Memo Management – leave no discount behind

Writing off credit memos is a little like turning on the incinerator when there’s cash inside. Learn what credit memos are, why companies create credit memos, and how to cash in every single one.

We’re all guilty of it: we buy something, return it for store credit, and then swiftly forget about the store credit. The same goes for business-to-business transactions. Sellers apply a credit memo to a future purchase but the buyer never takes them up on it. Money down the drain comes to mind.

It's time to make more of credit memos – here's what you need to know to better manage them. 

What a credit memo is

A credit memo, short for credit memorandum and occasionally known as a credit note, officially acknowledges a customer is owed money. That money can be applied to future purchases of goods and services. How is it different from a refund? Glad you asked. It's different from a refund because it provides credit for a future invoice amount, not cash, to the customer account.

Credit memos contain important information, including: the purchase order number, date of purchase, the original invoice number, corresponding invoice date, payment terms, billing details, buyer shipping address, prices, quantities, and more. They will also include the reason for the creation of the credit memo.  

Why credit memos get issued

You unbox the sneakers, slide them awkwardly on, wiggle your toes around, and realize you’ve made a big mistake. They are, in fact, way too big. You were being overly polite when you told the sales assistant they fit perfectly.

Sometimes it's size, other times it’s color, and sometimes you simply change your mind within 30-days. We return things for all sorts of reasons. For business goods and services it’s a similar story.

Here are some top reasons – there are many more – that would lead to the issuance of a credit memo for a future invoice and future purchases: 

  • The seller sent the wrong material

  • The seller accidentally overcharged the AP department

  • The goods were damaged in transit 

  • The seller was late in completing the delivery – and the buyer no longer needs the item

Why credit memos don’t get cashed

We’ve established what a credit memo is and the common reasons they get issued – now for the reasons they can go unused.

Approximately $3 billion worth of gift cards go unused every year in the United States alone. Since we’re talking about business services not the latest dunks, the dollar value of unused credit memos is dizzying – if not totally maddening. So, what gives?

Let’s go through a simple scenario to get to the bottom of it. Picture this: you’re working in the Accounts Payable function for a Shared Services Center and your vendor sends you a credit memo for the value of the goods you returned. There's a nice, accurate six-figure credit amount in the financial records of your customer account. Funnily enough, this is where problems can start – here are three common reasons why.

Crouching credit, hidden memos: Not all credit memos get stored in the same way, and some only exist in an email hiding out in your inbox. If you can’t easily find the memos, your chances of using them are slim to none.

Late to the game: If the six-figure credit comes in months after you’ve stopped using that vendor, imagine having to face the rigmarole of procurement for a one-off purchase using a credit memo. No thanks.

Mismatched amounts: The six-figure memo is great to have but your next purchase from the vendor is for half that. You’re now getting additional memos and you (and your systems) aren’t sure what to do with the original one for the total amount. Without a Marvel-esque memory, or sophisticated tech to keep track for you, you're onto a loser.

In the world of credit memos, where standards can be ill-defined, human grit and determination isn’t enough. Teams and departments that can’t successfully make credit memo transactions end up moving to higher priority tasks on the to-do list instead – with negative results for the business.

The negative impact of not using up credit memos

When teams don’t use a credit memo within a certain time period – typically 12 or 18 months – internal systems tend to automatically classify it as uncollectable and write it off.

Outstanding credit memos that go unused have consequences: the company takes on bad debt and sees its cash flow and P&L negatively impacted. 

How to better manage credit memos

Better memo management rests on making credit memos easier and faster to match to invoices. There are Accounts Payable departments making swift work of credit memos already – with processes set up that apply relevant memos automatically to invoices. With technologies like process mining, more departments can follow that lead.

By applying process mining to credit memo management, teams can: 

  • See the total amount of open and aging credit memos across vendors and ERPs

  • Prioritize outstanding credit memos by free cash flow and P&L impact

  • Match credit memos to invoices by invoice number, and vendor and company code

  • Apply an open invoice to a credit memo and communicate the changes to stakeholders

  • Read in six slides this CFO’s favourite credit memo management story.

Interested in learning more about credit memo management and making your processes work for you? Check out: 

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Edward Baggaley
Content Marketing Lead

Edward writes about Celonis, its customers, partners, and product. He creates blogs - perhaps the one you’re reading - as well as ads, ebooks, keynotes, and advertorials. Newsweek, The Times, Time, and many B2B magazines have published his work.

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