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Credit to Cash - Deduction Optimization: Time to eradicate the problem

Updated: May 17, 2019

Great Holiday Sales and Now the Deductions


Credit to Cash (C2C) automation is the ultimate answer to cracking the deduction management code. Each of our customers, especially in consumer products feel the revenue leakage pain from deductions as a direct impact to the bottom line. It is critical for technology and business strategies to be implemented for avoiding preventable customer deductions and optimizing the process for resolving the unavoidable.


Deductions are caused by a variety of different reasons. It could be a quality control issue, lack of communication between sales and accounts receivable, outdated order processing methods, problems with order fulfillment or shipping irregularities. Each deduction can be classified as three different types: Intentional deductions, preventable deductions, and unauthorized deductions. Your deductions, once classified, will guide you down the path of the appropriate optimization strategy if there is one at all.


Intentional deductions are usually sales related and include special promotions, advertising, and incentives. There is not much optimization that can be done around them because they are predetermined. Intentional deductions should still be monitored to verify they are not hurting your bottom line. Preventable deductions are most likely linked to compliance issues. These are the easiest types of deductions to find as well as optimize or eliminate. Unauthorized deductions are when the customer doesn’t pay the full invoiced amount because of returns, pricing or shortages. With a bit of improved oversight, these deductions can be properly optimized to prevent these from happening.


As businesses grow and the volume of transactions increases, the potential for financial error grows. As more businesses are aligned with the large retailers, the complexity of each transaction grows. Companies need a fast and easy way to identify deductions and their root causes, thereby cutting down the need for escalation, large reconciliation processes, potential for major revenue leakage and additional days sales outstanding (DSO) due to slow resolution time frames.


Being able to align execution with strategic intent is essential. By having real-time visibility into the order, fulfillment, returns, VMI, trade fund management and invoicing and payment processes, the goal of maintain a comprehensive and consistent view of your deduction management revenue losses and process of eradication.

Gaining access to broad knowledge-base, highly automated technology and a dedicated expert for driving accurate results is a must. Direct benefits of these now table-stakes include reduced costs, improved collections from disallowed claims, faster resolution, cleaner accounts and incisive analysis of trends and root causes. Helping your enterprise eliminate unnecessary deductions results in benefits ranging from lowered operating costs and increased productivity to a positive impact on working capital.


Efficiently addresses revenue leakage and DSO with a Deductions Management Platform to include RPA (Robotic Process Automation) and AI (Artificial Intelligence) is the trend but access and investment may be out of reach or thought to be so. The technology combines existing operational data elements from disparate systems, customers and vendors in a centralized uniform platform to reduce costs, improve collections, achieve faster resolution, produce cleaner accounts and achieve incisive analysis of root causes. So maybe gaining access to technology, skills and deduction management is best achieved in an outsourced model. Let’s walk through the detail.


The best plan for minimizing preventable deductions is to establish clear guidelines and to make sure all parties doing business agree to the same set of policies. It may sound obvious, but this will not only result in an easier path to resolving customer deductions but will also increase payment time.


Customer chargebacks may seem like a “cost of doing business” deduction, but they can actually be classified as unauthorized deductions. The way to optimize chargebacks depends entirely on your team size and type of business you run. It wouldn’t make sense for a B2B company to worry about chargebacks, but a large retailer deals with high-cost chargebacks in large quantities. Chargebacks for a large company can be dealt with by an in-house team or outsourced chargeback company, while a smaller company may benefit from cheaper automated tools which yield a lower success rate. Smaller companies (≤500 million in sales a year) have an easier time resolving customer deductions faster than larger companies based upon the experience of VWi.


It’s crucial to have a system in place on resolving deductions. One of the critical aspects of planning is to determine how long the customer deduction is allowed to remain open before the deduction is written off. Our insights into how some of the largest companies implement their customer deduction strategy. Of the VWi client companies surveyed, 48 percent report having no time limit for how long a reduction remains open or unresolved. This is down from 56 percent in 2015. In general, it was reported companies who resolve issues with their customers earlier often have a higher recovery percentage.


When dealing with deduction control, only a small part relates to customers. It’s important to identify the internal challenges and obstacles that may be causing a loss of profits. The biggest internal problems plaguing companies in order from most reported to least is cross-department cooperation, lack of resources, access to information and inefficient processes.


The most effective actions for optimizing the deduction resolution process according to those surveyed:


Focused on timely review & follow up

Remove manual processes with new automation

Improved cross-functional teams

Better communicated policies to customers

Improved deduction reporting and analytics


Also on the survey was the most effective steps companies took for preventing customer deductions:


Improved order accuracy

Made sales / other departments accountable

Involved other departments in customer onboarding and/or deal/promotion

Better communicated policies to customers

Performed root cause analysis

Improved cross-functional teams


Optimizing deductions isn’t an overnight process. It takes time to identify careful analysis of your financial reports and identify the largest holes in your system. The first step is to gather up the following from the last 12 months.


Sales

Non-trade-related deduction $ received

Invalid deduction $ received

Deduction $ recovered

Average open deduction $ > 90 days

DDO


With this information, you’ll have a clear picture of key the deduction areas to focus on to help you choose the optimal deduction strategy for your company.


Robert Sherman, Chief Revenue Officer of VWi