The Silent Impact of Unsourced Returns on Finance

The Silent Threat of Unattributed Returns: How It Impacts Your Finance

Unattributed returns are a unique challenge in retail sales where returned goods can't be directly linked to a specific sales order. This presents several hurdles for financial management, from accurate cost accounting to problem identification and risk mitigation. Let's explore the specific impacts unattributed returns have on both financial accounting and management accounting.

Frequently, I encounter finance professionals or even accounting students asking about the implications of unattributed returns on finances.

Let's break down this issue: there are two primary scenarios for returns – procurement returns (also known as purchase returns or reverse supply) and sales returns. Unattributed returns refer specifically to sales returns, where a warehouse receives returned goods but lacks information on which sales order they originated from.

To understand the impact, consider the structure of a finance department, typically divided into financial accounting and management accounting. Financial accounting focuses on recording, managing funds, and preparing financial statements. Management accounting handles budgeting, planning, and performance reporting.

Now, let's examine the impact of returns in general: they lead to increased inventory levels and decreased costs, while simultaneously reducing accounts receivable and revenue.

This is where management needs to dive deeper – attributing the reasons for returns. Are they due to quality issues, customer dissatisfaction, slow shipping by couriers, or incorrect dispatch from the warehouse? If it's a quality issue, was the problem with the original inventory or damage during transit?

The crucial point: unattributed returns eliminate the vital sales order information! This makes pinpointing the root cause almost impossible.

Impact on Financial Accounting:

• Cost Calculation Challenges: If your costing method relies on batches, tracing the specific cost of returned goods linked to a sales order becomes impossible.
• Inventory Cost Distortion: Without order and batch information, calculating the true cost of incoming inventory can be skewed, potentially leading to inaccuracies in your financial statements.
• Second-Sale Complications: Industries with short shelf lives like beverages face unique challenges. Without batch traceability for unattributed returns, determining their remaining lifespan becomes difficult. This often results in all unattributed goods being written off, impacting revenue and profitability.

Impact on Management Accounting:

• Attribution Difficulties: Unattributed returns hinder accurate problem identification. It's impossible to quickly pinpoint whether the issue stems from procurement, production, or logistics if you lack order details.
• Missed Risk Indicators: Without clear data on customer demographics and purchasing patterns associated with unattributed returns, identifying potential fraud or malicious activity becomes challenging.

In conclusion, unattributed returns present a significant risk to your financial stability. Implementing robust systems for tracking sales orders, implementing inventory management practices that account for batch information, and establishing clear processes for handling returns are crucial steps to mitigate these risks.