Deductions management is a part of accounts receivables and critical to maintaining your cash flow and profitability. Deductions occur when a customer disputes or doesn’t pay the due amount. If it is valid, you must remove the amount from the invoice and issue a new one to the customer.
90% of the time, deductions implied to customers overdue are valid. However, analysts still must research every deduction to be very sure of the amount to be recovered. The traditional manual process to conduct this can be extremely time-consuming and prone to errors.
This is where the AI-driven deductions management process comes into play. It not only helps predict the validity of the deductions but also proactively gathers backup documents, freeing up an analyst’s time to focus on deductions that have a high probability of recovery. In this blog, we will explore everything you need to know about an automated dispute management system. Let’s dive in.
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:
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.
Customer deductions are a part of the accounts receivable process where a customer refuses to pay and disputes an invoice. These deductions are usually straightforward. For instance, customers may raise a deduction if they were promised a volume discount, but the invoice does not reflect the same.
Dealing with customer deductions requires a lot of research, auto-matching with internal documents, and then checking the validity of deductions. Here are a few deductions management best practices to ensure seamless handling of customer deductions.
A deductions management process is the process followed by the accounts receivables department to resolve deductions. It involves validating disputes, modifying invoices, and communicating with customers, and it varies based on the company size, preferences, and software capabilities.
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.
An effective deduction management process must be capable of solving disputes on time, improving customer experience, and reducing day deductions outstanding (DDO).
An effective deduction management process is critical to analyze, monitor, and resolve discrepancies highlighted in a customer’s invoice. You can implement an advanced deductions management system to reduce loss, streamline cash flows, and improve customer relations by resolving deductions as fast as possible. Here’s how a customer deductions management process works.
An analyst receives dispute tickets from either the client or a deduction claim from the accounts department.
The analyst then prioritizes the claims in order of importance, usually based on the deduction value.
After the deduction or short payment is identified, the analyst gathers backup information and finds the invoice’s source. 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.
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.
After collating the documents, the analyst matches different records with the claims document and works on determining the deduction’s validity.
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.
If the deduction claim is invalid, the analyst sends a manual correspondence to the client informing them 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.
After the claim has been declared valid, the analyst informs the accounts department of the validity of the claim request and asks them to update the invoice into the ERP and issue a credit or debit memo as needed. After this, the client’s account status is closed.
Reports are prepared manually, usually in Excel, which helps the managers and executives understand the performance of the deductions functions. However, creating these reports becomes very time-consuming due to the unavailability of real-time data.
The deductions management process can be done either manually or with automated deductions management systems. The manual approach involves navigating through a labyrinth of paperwork. You must submit tickets, gather and validate dispute information, check backup documentation, and then resolve claims—a time-consuming and error-prone process.
So, the alternative is to use a well-designed deductions management system that will help you automate data gathering, prioritize deductions, and automate trade promotion matching. However, while these systems help streamline the deductions management process to a great extent, they still lack critical capabilities and struggle to adapt to changes in customer websites. Here are some of the key challenges with traditional accounts receivable deduction management systems:
Traditional deduction processes do not offer any in-built functionalities for automatching. To automate this process, your IT team will need to build custom algorithms, which must be rewritten every time the system is updated. Adding to your hassles, you will need to build these algorithms from scratch every time a new customer joins the list.
Traditional systems or processes don’t have any capability for customized denial correspondence. Deduction analysts have to reach out to customers manually since there are no out-of-the-box features available and you have to manually customize the system, which could take months to maximize the outputs of the AR department.
An ideal deduction management process goes beyond the basic automated features of prioritizing worklists and automating data collection. To help you get holistic control over deduction management, HighRadius’ deduction management solution offers numerous state-of-the-art features to boost analysts’ productivity and help reduce the negative impact on cash flow and profitability.
Automation helps you analyze all data relating to the Deductions and Invoices and accurately predict the chances of a Deduction being Valid/Invalid. Our deduction management solution comes with an AI Deductions Validity Predictor that uses AI algorithms that look at 20+ variables (Dispute Type, Dispute Amount, Ship to, and others) and 12 months of Dispute Resolution History to identify which Deductions have a high probability of being Valid/Invalid.
For example, companies have approximately tens to hundreds of thousands of open Deductions at any time. Only 3-5% of these Deductions are invalid, but companies must research each Deduction to identify the invalid ones. Thus, the department spends 20X the time identifying these, while the remaining valid ones get a cursory look. The feature helps identify these invalids and maximizes the chances of recovery.
Claim backup involves aggregating customer web portals and email claims and auto-link claims documents to deductions. The claim backup automation feature automates the aggregation of Deduction backup documents. It usually includes Claim Copies or Debit memos from Customer portals and emails.
For example, John, a deductions analyst, typically spends 30-40% of their time aggregating backup documents necessary for Deductions research. The Claim Backup Automation module completely automates this task and links these documents to the relevant Deductions. The analyst can start working directly on the deductions research process.
When dealing with customer deductions, it’s important to understand why a customer is taking a deduction so it can be routed to the right team based on customer name, reason code, etc. Automation here will not only help you resolve deductions faster but also visualize deductions in your work queue on the day it’s created instead of waiting for manual intervention.
The deductions auto-coding feature in our solution leverages over 200+ implementation projects to build a library of reason code identification algorithms to help you easily identify why a customer took a deduction. For instance, Walmart would provide a reason code of 22-25 indicating Shortage-based Deductions.
Pricing Deductions occur when there is a disconnect between what was invoiced to the customer versus what the customer feels is the right amount. To resolve this, you need to aggregate claim data from websites and emails to verify the discounted price and match it with internal contract and pricing documents.
Features like pricing deduction research automation identify the price difference between what was captured in ERPs and what a customer is claiming. It then auto matches the discount with internal records with the right price. Our solution uses LiveCube to automate 4-way matches among deduction, claim backup items, sales invoices, and pricing contracts to ensure the validity of the deduction.
Businesses run trade promotions to incentivize clients to buy more. Even though these deductions are planned, you need to research all the trade deductions and identify invalid ones. Searching for an invalid Deduction is similar to searching for a needle in a haystack. HighRadius Deductions Management automatically matches customer claims to trade promotions to check the validity of trade deductions.
Our trade promotion auto-matching feature uses a 3-way matching algorithm of trade promotions, claim backup line items, and material/item master. It tags every deduction line item captured from the claim documents as valid/invalid based, on adhering to the right trade fund, amount, and promotion effective dates.
Certain deductions may need approvals at multiple levels before they can be resolved. For example, a trade deduction needs to be approved by the salesperson first and then by an AR manager to ensure accuracy when resolving it.
Automated workflows and collaboration in the deduction management process allow you to set up approval matrices. Also, multiple departments can collaborate to share deduction updates and documents via a single platform, bringing efficiencies into the deduction research and resolution process.
For some deductions like shortages, you need a Proof-Of-Delivery document to validate whether a customer’s claim for deduction is valid. These documents can be automatically aggregated with the help of our deduction management system. Our POD automation tool automates aggregating POD documents from carrier portals, emails, and links to the respective deductions. It also helps identify signed vs unsigned POD documents.
Once a team has completed the analysis for a Deduction, for invalid deductions, they need to reach out to customers, either via email or through website portals. Our dispute denial automation feature provides complete correspondence for denial notices. It comes with pre-configured email packages of denial letters to customers and also auto-attaches relevant documents such as POD or Invoice/PO copy based on the deduction type.
In addition, for customers requiring customers to go onto portals and deny claims, our dispute denial tool can automate this with integrated RPA technology for posting data onto customer websites.
The deduction management process relies heavily on gathering backup documents, matching to identify validity, and collaborating for documents and approvals. HighRadius makes this process easier by leveraging AI. Our automated deduction management software predicts the validity of the deduction and proactively gathers backup documents using embedded RPA. This frees up 80% of analysts’ time so they can focus on deductions with a high probability of recovery.
The result? You can unlock 50% increased net recovery rates and improved deduction resolution efficiency.
A deduction in AR is a decrease in the amount owed by a customer. It arises from discrepancies or issues related to invoices, payments, or agreements. Deductions can include discounts, returns, allowances, or claims for damaged goods and need thorough analysis to determine whether they are valid.
Deduction analysts investigate and resolve deductions in account receivables. They identify opportunities to improve processes that will minimize non-promotional deductions, clear them more timely, and play a crucial role in maintaining financial accuracy and customer satisfaction.
Customer deductions can impact receivables by reducing the amount owed by customers. Not addressing or resolving deductions proactively will not only affect your cash flows but also reduce your profitability. Moreover, it can prolong the aging of receivables, delay collections, and affect financial performance.
Deduction management is important to maintain financial health. It helps identify and resolve deductions swiftly and accurately, leading to better cash flow, reduced discrepancies, and more streamlined operations. It will also improve responsiveness and improve customer satisfaction.
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. An inefficient process can also lead to errors, incorrect deductions, or unresolved issues.
Deductions in OTC refer to the underpayment of debt due to damaged goods, billing errors, or wrong merchandise. This can be resolved through an effective deduction management process as it ensures timely collection of payments without straining customer relationships or the bottom line.
The stages of the deduction management process look like this:
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