Deductions Management: The Process 

Deductions Management: The Process

Deductions are a part of accounts receivable management and occur after a customer disputes or doesn’t pay a certain amount of their total owed. If your company agrees that the disputed or short-paid amount should be removed from the customer’s bill, then the amount is deducted, and the bill (or invoice) needs to be adjusted and reissued. Disputes and deductions go hand in hand.

The deductions management process is how the A/R team validates disputes, modifies invoices and account statements, and communicates with customers throughout the process.  

Many deductions are generated legitimately as part of agreements allowing for a percentage of damaged products, volume discounts, or other purchasing power. However, it’s not unlikely for a customer to take a deduction even when those arrangements haven’t been met, whether intentionally or unintentionally.  

Types of Deductions

Earned Deductions 

Earned deductions provide a discount to customers based on certain parameters. For example, say your customer, Gorman Manufacturing, regularly purchases a large volume of widgets and is given a 10% deduction (or discount) each month to entice them to continue purchasing that much. This type of deduction is part of a normal course of business; however, there is still work associated with managing earned deductions. 

Claims Deductions 

Claims deductions occur when a portion of a payment is deducted for some reason that generates a dispute (like damaged goods) and often leads to a claim. For example, Gorman Manufacturing purchases 10,000 widgets, but 5% of those arrive damaged. The company proactively deducts a portion of the order. What complicates this process further is when there are return merchandise authorizations (RMA) to consider.  

Goals of Deductions Management 

When done manually, deductions management can be very labor-intensive and time-consuming. Companies should streamline the process and operate as efficiently as possible so that they do not fail to collect legitimate revenue and leave their customers waiting for an answer and a corrected bill. 

Here are some goals that companies can consider for a successful deductions management process: 

Timely Resolution – It’s important to resolve disputes as soon as possible (this is known as dispute resolution). The more time spent on researching and validating disputes, the less money you are collecting – and the more your customers may get aggravated by long wait times. 

Improved Customer Service – Providing a timely resolution can help improve customer service. Your customers don’t want to wait weeks after sending backup documentation for your company to authorize the deduction, correct the invoice, and resolve the billing error. 

Reduce Revenue Leakage – If your deductions management process is inefficient, this can result in revenue leakage – or wasted, uncollected revenue that is never recovered. Unchecked, this can become a habitual offense that can cost thousands and even millions of dollars in lost cash – impacting cash flow, working capital, and profitability. 

Reduce Days Deductions Outstanding (DDO) – Similar to Days Sales Outstanding (DSO), Days Deductions Outstanding (DDO) tracks companies’ ability to resolve deductions over a given period of time. This metric illustrates how effective you are at identifying and resolving deductions. Here is the formula for calculating DDO: $ Amount Open Deductions / Average Value of Deductions x Period = Days Deductions Outstanding

Deductions Management Process – Manual vs. Modern 

The manual nature of deductions management can be problematic for businesses. Manual processes involve a lot of paperwork. Customers submit tickets for the dispute and supply backup documentation for their claims. Meanwhile, your company may spend weeks researching and validating the claim, rendering an adjudication, applying a credit or debit memo, and adjusting the bill and its own books. 

To do this every month for high-volume, high-value customers​,​ can get overwhelming for A/R teams.

How AI and Automation Can Help With Deductions 

The deductions management process is ripe for modernization through technology and automation that leverage AI-driven data and analytics to make A/R teams’ jobs much easier. Automated processes allow A/R teams to focus on timely resolution and revenue collection and help them: 

Reduce Manual Work – Technology can help A/R teams from manually having to identify, validate and dispute claims and adjust invoices and books. With all the saved time, people can refocus on other key initiatives that better impact success.

Get to the Root Cause – With technology, A/R teams can quickly and accurately report the impact of disputes and deductions on the business – both positive and negative – and understand their root causes. 

Optimize Processes – Through an integrated, system-based approach, companies can reduce revenue leakage and optimize the entire deductions management process to reduce “time to money” – including root cause analysis, collections, impact to cash flow, and their ability to apply money quickly and accurately.  

D&B Finance Analytics Receivables Intelligence 

D&B Finance Analytics Receivables Intelligence is an AI-powered platform that automates the dispute and deductions management process to make it more efficient. With Receivables Intelligence, workflows are streamlined—from issue identification to resolution—using machine learning tools. The optimization can result in a reduction in DDO, a closed gap ​in ​​on ​revenue leakage, and an improvement in your customer’s experience. 

Receivables Intelligence automates the following key processes in the disputes and deductions cycle: 

Discovery – This AI-powered platform automatically identifies the cause of disputes and deductions using rule-based logic and comprehensive datasets. Data is collated from disparate sources such as EDI, emails, payments, remittances, and A/P portals to categorize the cause of deduction to allow for further processing. Embedded workflows also preempt certain deductions through early discovery steps. 

Validation ​–​​ Once identified, disputes and deductions are automatically validated. API calls to carriers are made to verify POD​’​s; check contract terms and PO limits; and check other claims for damages, tax deductions, discounts, and freights; then validated against internal or external data sources. 

Approvals & Escalations ​–​​ Disputes and deductions, including escalation notifications, are automatically routed to those roles with necessary approval limits based on your company’s hierarchy. An approver portal allows for instant decisioning. Machine learning is used to auto-approve the most frequent scenarios, saving time on common valid disputes and deductions. 

Adjudication ​–​​ Adjudication workflows auto-create the appropriate debit or credit memos and adjustments to customer balances. These adjustments are auto-posted to your accounting system, and adjustments can be made to any invoice headers or line​-​items. 

Communication ​– Customers and internal partners, such as sales representatives, are automatically notified upon resolution. This includes copies of debit memos to customers when the dispute is denied for the deduction.