What Is Deduction Management in Accounts Receivable (AR)?

Introduction

Deductions management is a critical process for any business that wants to maintain a healthy cash flow and profitability. It involves handling the process of validating disputes, modifying invoices and account statements, and effectively communicating with customers. However, the traditional manual process can be time-consuming and prone to errors.

In recent years, businesses have started to incorporate technology and artificial intelligence (AI) to improve the efficiency and accuracy of the deductions management process. In this article, we will explore what deductions management is, how it works, and the benefits of using technology and AI to streamline the process. We will also discuss the challenges of manual deductions management and how technology can help overcome them.

What is Deduction Management?

When a company receives less payment from its customers than what was expected for unknown reasons, the amount that is not paid is considered a deduction. This deduction might happen due to a variety of reasons such as:

• Damaged goods
• Billing errors
• Shortage in shipment

Companies need to assess their deductions management process to determine the reason and validity of the deduction taken. But, before we dive deep into the details, let us first understand what a deductions management process is.

What is the Deductions Management Process?

A deductions management process is the process followed by the AR teams to resolve deductions. It  involves validating disputes, modifying invoices, and communicating with customers, and it might vary from company to company based on the size of the company, preferences, and the software capabilities of the organization

An efficient deduction management process could help a company increase the recovery rate and decrease the time spent in resolving disputes. However, most companies manage deductions manually, and the manual traditional deductions management process is inefficient

To make it effective, companies need to scale it up with the help of technology and artificial intelligence. But before you do that you need to understand how the manual deduction management process works. 

Manual/Traditional Deductions Management Process

Managing deductions effectively is crucial, but when doing it manually, it becomes very challenging. There are a lot of challenges in the manual, more traditional deductions management process, the biggest being that it involves a lot of paperwork. So, it can get overwhelming for AR teams, especially as companies grow. Let’s look at the steps involved in managing the deductions management process in detail.

Managing deductions effectively is crucial, but when doing it manually, it becomes very challenging. There are a lot of challenges in the manual, more traditional deductions management process, the biggest being that it involves a lot of paperwork. So, it can get overwhelming for AR teams, especially as companies grow. Let’s look at the steps involved in managing the deductions management process in detail.

Recommended Reading: Accounts Receivable Reports Every AR Leader Should Track in 2023 and Beyond.

Step 1: Receiving dispute tickets

An analyst receives dispute tickets from either the client or a deduction claim from the accounts department.

Step 2: Prioritizing claims

The analyst then prioritizes the claims in the order of importance. This is usually done based on the deduction value.

Step 3: Gathering data

After the deduction or the short payment gets identified, the analyst works on gathering the back-up information and finds the source to the invoice. Finding the source helps the analyst identify the right stakeholders for the invoice. 

After identifying stakeholders, the analyst manually researches and collates all the documents related to the invoice – Proof of Delivery (PoD), Bill of Lading (BoL), order invoice, sales invoice, tax receipt, and other documents related to the order.

Step 4: Requesting for data

In case some information is missing or incorrect, the deductions analyst manually reaches out to the stakeholders and internal teams to gather the required data.

Step 5: Resolving deductions

After collating the documents, the analyst matches different records with the claims document and works on finding the validity of the deduction.

Step 6: Getting approval

If the claim matches certain criteria, the deductions analyst might have to follow up with their superiors to get approval. This takes another round of back and forth and further delays the resolution.

Step 7: Following up with customer

If the deduction claim is invalid, the analyst sends a manual correspondence to the client informing about the rejection of the claim request. If the deduction claim is valid, the analyst engages with the client and issues either a credit memo or a debit memo for future use by the client.

Step 8: Syncing changes with ERP and TPM systems

After the claim has been declared valid, the analyst informs the accounts department regarding the validity of the claim request and asks them to update the invoice into the ERP and issue a credit or debit memo as per need. After this, the account status for the client gets closed.

Step 9: Reports

Reports are prepared manually, usually in excel, which helps the managers and executives understand the performance of the deductions functions. Creating these reports becomes very time-consuming due to the unavailability of real-time data. 

Now that we have a good idea about the challenges in the traditional deduction management process, let’s find out how Artificial Intelligence could help companies automate these processes and help the deduction management team to focus on early detection and resolution of disputes.

How Leveraging AI and Automation Can Help In Deduction Management

AI and automation have the potential to revolutionize deduction management processes, enabling businesses to work smarter and more efficiently. As discussed above, deduction management is the process of validating and resolving deductions taken by customers, and it can be a time-consuming and complex task. 

However, by leveraging AI and automation, businesses can streamline and optimize these processes, resulting in significant time and resource savings. Here are some ways that AI and automation can help with deductions:

• Predicting the probability of a deduction being valid or invalid based on deductions data and invoice factors.
• Automatically extracting claim backup documents from websites and emails and linking them to deductions.
• Automatically identifying deductions reason codes and converting them to ERP-specific reason codes to route them to the right analyst.
• Automatically extracting and matching customer claims to trade promotions for validation.
• Identifying a shortage variance or pricing deduction by automatically extracting POD, claim backup documents, and performing a three-way match with invoice data and claim data.
• Validating a return deduction by automatically extracting POD, claim backup documents, and setting up an interdepartmental collaboration and approval workflow.
• Automating majority of manual deductions processing, including creating and identifying deductions from various customer-provided remittances.
• Delivering powerful reporting capabilities on deductions and disputes, helping businesses identify patterns and root causes associated with the issues, leading to resolution.

By integrating artificial intelligence, machine learning, and automation, organizations can streamline and optimize these processes. Intelligent algorithms can analyze vast amounts of data, identifying patterns and predicting the validity of deductions. 

For businesses keen on exploring the broader landscape of deduction management and benchmarking their performance, there’s a wealth of insights available. Our article discusses average deduction benchmarks, including the volume of deductions processes, total value of deductions processed, average auto-write off per month, average deductions resolved per analyst, and more.

Here's How Highradius Can Make Your Deductions Management Process More Efficient

HighRadius Deduction Management Software helps reduce the time and effort so that deductions specialists can focus on high-level tasks. Let’s understand the steps in detail.

Step 1: Data collection

The solution pulls the following data automatically: 1. A feed of deductions from your ERP 2. Promotions and commitment data from TPM 3. Supporting documents(Claims and POD) for all the deductions from EDIs, emails, paper-based copies, or customer portals.

Step 2: Data linking

The deductions/pre-deductions information, along with the promotions and commitment information, is automatically linked with relevant documents via predefined rules.

Step 3: Validating deductions

The AI software starts auto-matching, where it figures out whether or not there is any validity in the deductions taken by your customers.

Step 4: Creating a prioritized worklist

The solution creates a worklist for each of the deductions specialists for the high-level tasks that they need to perform. The worklist contains all the deductions auto-assigned to the deductions specialist and the recommended steps to be taken, as suggested by the system neatly arranged in a prioritized manner.

Step 5: Additional documents

Other employees of the organization could easily access any additional documents/information, from within the software itself, which once sent, would automatically get linked to the deduction. This saves a lot of time, which is spent back and forth.

Step 6: Resolving deductions

The deductions specialist now validates what the system has auto-matched and reviews the suggestions made. In case of a mismatch of the information provided by the customers, the specialist reaches out to the customers. Based on this research, the deductions could either be approved or denied.

For approval:
The deductions specialist simply marks this as approved, and it gets sent through the multilevel approval process of the company. The process might also vary depending on the deduction amount.

For denial:
If a deduction is denied, the correspondence is sent to the customer via an EDI or an email by the solution automatically or even uploaded to the client’s web portals.

Step 7: Syncing changes with ERP and TPM systems

The different resolutions are sent to the ERP and TPM, where all these changes are made automatically.

Step 8: Reports

The solution also creates multiple reports for mid and senior management. This helps them review the performance of the deductions activities at different levels based on the teams, individuals, regions, and customers. 

In today’s technology-driven world, companies need to look beyond the traditional approaches and choose the right deduction management process to uncover additional business values. 

FAQs

1). What is deduction in accounts receivable?

Deduction is a part of accounts receivable management and occurs after a customer disputes, or doesn’t pay, a certain amount of their total owed.

2). What does a deduction analyst do?

Deduction analyst identifies opportunities to improve processes that will minimize non-promotional deductions, clear deductions in a timelier manner and provide more extensive or reliable information to Marketing for promotional deductions taken.

3). What is the customer deductions impact on receivables?

Customer deductions can impact receivables by reducing the amount owed. Promptly addressing and resolving deductions is essential to maintain healthy cash flow and accurate accounts receivable.

4). Why is deduction management important?

Deduction management is important because it helps businesses maintain their financial health by identifying and resolving deductions swiftly and accurately, ultimately leading to better cash flow, reduced financial discrepancies, and more streamlined operations.

5). What happens if the deduction management process is inefficient?

If the deduction management process is inefficient, it can lead to revenue leakage or wasted revenue that is never recovered, impacting operational efficiency, cash flow, and profitability. Additionally, an inefficient process can lead to errors, incorrect deductions, or unresolved issues.

6). What are deductions in OTC?

Deductions in OTC refer to the underpayment of debt, typically caused by various reasons such as damaged goods, billing errors, or wrong merchandise. An effective deductions management process is essential for resolving these disputes quickly – ensuring you collect payments expeditiously without straining relationships or lowering your company’s bottom line.

7). What are the stages of deduction?

The stages of deduction management process may vary from company to company, but generally, it includes the following steps:

1. Receiving dispute tickets or deduction claims from the customer or accounts department.
2. Prioritizing claims based on factors such as the amount of loss, research required, and time window for dispute.
3. Collecting supporting documents and data from internal teams and stakeholders.
4. Validating the deduction by matching different records with the claims document and finding the validity of the deduction.
5. Resolving the deduction by approving or rejecting it and making any necessary corrections to the profit and loss record.
6. Communicating the resolution to the customer and keeping accurate records of all interactions and resolutions.

Throughout the process, it is crucial to maintain clear communication with the customer and keep accurate records of all interactions and resolutions. This is essential for tracking trends, identifying root causes of deductions, and implementing preventative measures to minimize future deductions.