9 Steps of Deductions Management Process and How to Optimize Them? (Jan 2024)

11 December, 2019
15 min
Brett Johnson, AVP, Global Enablement

Table of Content

Key Takeaways
Chapter 1: Introduction 
Chapter 2: Key Challenges Encountered in Deductions
Chapter 3: Streamline Your Deductions Management Process with Autonomous Receivables
How Does HighRadius Ensure Smooth & Faster Deductions ResolutionS
Conclusion

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Key Takeaways

  • Discover the importance of deductions in order to cash cycle
  • Learn about the evolution of deductions management and its impact
  • Dive into strategies for better deduction management
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Chapter 1: Introduction 

Efficient deduction management is the key to ensuring your business maintains its financial health. It’s all about identifying and resolving deductions swiftly and accurately, ultimately leading to better cash flow, reduced financial discrepancies, and more streamlined operations.

However, given the high volume of transactions, managing deductions can be challenging. To streamline this process and effectively manage and resolve deductions faster, it is important that we leverage technology.

In this brief guide, we’ll explore what deduction management is, the steps involved in the deduction management process, and how to streamline your deduction management in the most effective way possible.

What Is Deductions Management?

Deductions management is the process of validating & resolving deductions taken by customers. Deductions can be of various types like shortages, pricing, returns, trade promotions, etc.

For example, let’s say a customer orders 100 units of a specific product from a CPG (Consumer Packaged Goods) company at an agreed-upon price of $5 per unit. However, when they received the invoice, they noticed that they were billed $6 per unit instead of the agreed-upon $5. In response, the customer deducts $100 (100 units x $1 difference) from their payment to reflect the correct pricing. This deduction would then need to be investigated and resolved through the deductions management process.

Types Of Deductions

There can be various types of deductions in an order-to-cash scenario. Here is a list of some common ones-

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It’s essential for businesses to effectively manage and resolve deductions to maintain healthy financial relationships with customers and suppliers. Understanding the different types of deductions helps in identifying and addressing issues promptly. Now that we know the types of deductions, let’s focus on the overall process.

Steps Involved in the Deductions Management Process

Deductions management is a crucial process for businesses to ensure that they are not losing revenue due to unauthorized or incorrect deductions from their accounts receivable. 

Here’s a step-by-step process for managing deductions effectively:

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  • Step 1: Identify Deductions

    The process begins with monitoring all incoming payments and invoices regularly to identify any deductions and discrepancies. Deductions can include discounts, returns, pricing disputes, and other deductions.

  • Step 2: Gather Relevant Documents

    The next step is to collect all relevant documentation related to the deduction, such as invoices, including the customer’s name, invoice number, reason for the deduction, and any communication with the customer.

  • Step 3: Categorize & Review Deductions

    The analysts then categorize the deductions into different types like trade deductions or non-trade deductions like pricing, returns, etc. to streamline the resolution process. This information is then reviewed and analyzed to determine the validity of the deduction. 

  • Step 4: Resolution Process

    Once the validity of the deduction is established, the process moves on to the resolution stage. This involves doing extensive research, contacting the customer to discuss the deduction, and gathering further information if necessary. The goal is to reach a mutual agreement and find a resolution that satisfies both parties. 

  • Step 5: Updating Records

    In some cases, the resolution may involve providing additional documentation or clarifying any misunderstandings. Alternatively, the deduction may be deemed valid, and the company may need to adjust its records accordingly. 

    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. 

    Ultimately, an effective deductions management process helps companies maintain strong customer relationships, reduce financial losses, and improve overall operational efficiency.

Chapter 2: Key Challenges Encountered in Deductions

Management Process

Ineffective management of disputes and deductions can result in organizational confusion, delays, errors, and disputes with customers. To mitigate these issues, it is crucial to comprehend the challenges inherent in the deduction management process. Below, we will explore several of these challenges.

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  1. Time-consuming and Error-prone

    Manual deduction management is time-consuming and error-prone. It involves a lot of time and effort spent on tasks like verifying deductions, collecting support documents, communicating with customers or vendors, and documenting each step.

    Since it’s all done by hand, it’s prone to human errors like typos, misunderstandings, and oversight. These errors can result in incorrect deductions or unresolved issues.

  2. Inefficient Process Leading to Delayed Resolution

    The traditional process requires analysts to go through all sources of information such as customer web portals, fax formats, print and mail, and email formats. These are menial and tedious tasks that can take up valuable resources and thus delay the resolution of valid deductions.

  3. Limited Visibility & Difficulty In Tracking

    The traditional deductions management process lacks real-time visibility, making it difficult to prioritize and address high-priority deductions promptly. With manual processes, gathering and analyzing data on deductions can be challenging. This hinders the ability to identify patterns or trends that could help address root causes and prevent future deductions. 

    For example, Customer ABC raises an issue about a pricing error, claiming they were charged $5,000 more than their contract’s agreed-upon price for a recent order.

  4. After the analyst receives this deduction claim, the next step involves gathering documents from different sources and checking their validity. This process requires a lot of manual research as analysts go through multiple documents to verify the deduction. Each invoice must match documents like purchase orders, sales orders, proof of delivery, or bill of lading.
  5. Suppose the documents don’t support the claim, making the deduction invalid. In that case, the analyst must manually create and send denial correspondence with the attached documents. When dealing with numerous customers and correspondences, this process becomes time-consuming, error-prone, and challenging.
  6. This manual approach affects the entire process, leading to strained customer relationships, inconsistent follow-ups, and lower deduction recovery rates.

Overcoming these challenges is crucial for organizations to effectively manage deductions, reduce costs, and enhance customer satisfaction. But tackling these challenges can be overwhelming, and that is where technology comes into the picture. In the next section, we will the capabilities of AI and how HighRadius can make the life of a deductions analyst easier by improving efficiency and net recovery rate.

Chapter 3: Streamline Your Deductions Management Process with Autonomous Receivables

Now that you know the challenges involved in the manual deductions management process let’s look at how to address them.

While automation can speed up the process, there will still be times when a deductions analyst will need to step in and review a deduction manually, if the system can’t recognize data.

The deduction resolution process requires more than just automation. They need to be autonomous, with artificial intelligence (AI) positioned as an integral part of the tech stack.

Autonomous Receivables does not mean there is no human presence; it simply means that the human does not need to be the glue that holds the process together. It breaks the siloes across A/R teams & improves visibility & decision-making to ensure financial health with end-to-end integrated receivables.

Autonomous Deductions Management Process

An autonomous deductions management process streamlines the identification, tracking, and resolution of deductions taken by customers from their payments. Let’s dive deep into how AI-powered deduction management software will change the receivables game.

  1. Automated Data Capture: Automated data capture mechanisms collect information about deductions from various sources, such as invoices, payment receipts, and communication with customers.
  2. Deduction Identification: Deduction data is analyzed and automatically matched with corresponding invoices, contracts, and supporting documents to identify discrepancies and inconsistencies.
  3. Prioritization: The system assigns priority levels to deductions based on predefined criteria, such as the deduction amount, type, or potential impact on cash flow.
  4. Workflow Automation: Automated workflows are triggered based on deduction types. For example, a workflow for pricing discrepancies may involve steps like verification and approval by relevant departments.
  5. Communication and Collaboration: The system facilitates communication and collaboration among different departments involved in deduction resolution, such as sales, finance, and customer service. It may send notifications and reminders to stakeholders.
  6. Document Management: A centralized repository stores all deduction-related documents, including invoices, emails, notes, and supporting evidence. This ensures that all relevant information is readily accessible.
  7. Resolution and Dispute Management: The system guides users through the resolution process, providing information and suggestions based on predefined rules and historical data. Users can update invoices, issue credits, or communicate with customers to resolve issues.
  8. Analytics and Reporting: Throughout the process, the system generates analytics and reports that offer insights into deduction trends, root causes, and resolution times. These reports help organizations make informed decisions and improve processes.
  9. Automation of Recovery/Collaboration with Collections Team: Once a deduction is resolved, the system can automate the process of recovering funds by adjusting invoices, applying credits, or setting up future payment schedules. In some companies, cash applications and deductions teams work together to get the payments applied.
  10. Integration:  Automated deductions management systems often integrate with other enterprise systems, such as accounting software, ERP (Enterprise Resource Planning) systems, and customer relationship management (CRM) tools.
  11. Real-time Monitoring: Organizations can monitor the status of deductions in real-time through dashboards and alerts, allowing for quick responses to any emerging issues.

An automated deductions management system has several benefits, let’s take a closer look at some of them.

Benefits Of Deductions Management Process

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  • Improved Efficiency: Automating the deductions management process, eliminates the manual tedious tasks and makes it error-free.
  • Improved Accuracy and Faster Resolution: Automated deductions management processes improve accuracy and consistency. The system can easily identify discrepancies and inconsistencies in deductions, ensuring that all deductions are properly accounted for and resolved in a timely manner. This helps to prevent revenue leakage and ensures that the company is not losing money due to unresolved deductions.
  • Better Visibility & Decision making: Automated processes also offer better visibility and control over deductions. Managers can easily track and monitor the status of deductions, identify trends, and analyze data to make informed decisions. This proactive approach resolves recurring or problematic deductions, ultimately boosting profitability.

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How Does HighRadius Ensure Smooth & Faster Deductions ResolutionS

The HighRadius Deductions Management solution, you can improve analyst productivity by 40%+, reduce DDO by 20% and, improve your NRR by 60%. Sounds intriguing, right? Let us understand how that is possible.

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  1. AI-based Deductions Validity Predictor

    The Highradius Deductions Management system 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, on average, companies have approximately tens to hundreds of thousands of open deductions at any given time. Only 3-5% of these deductions turn out to be invalid, but companies have to research each deduction to identify the invalid ones. Thus, the department ends up spending 20X the amount of time to identify these, while the rest of the valid ones get a cursory look. The AI-based Deduction validity predictor helps identify these invalids and maximizes the chances of recovery. 

  2. Claim Backup Automation 

    The Highradius Deductions Management system automates the aggregation of deduction backup documents such as Claim Copies and POD or Debit memos from Customer portals and emails. 

    For example, John (Deductions Analyst) typically spends 30-40% of his time trying to aggregate backup documents that are necessary for Deductions research. The Claim Backup Automation module completely automates this task and links these documents to the deductions. The analyst can directly start working on the deductions research process.

  3. Trade Promotion & Non-Trade Deductions Auto-Matching:

    HighRadius Deductions Management solution collects data from various sources such as Claim Copies, Proof of Delivery (POD), and Invoice Copies. It then applies a 3-way matching algorithm to determine whether the deduction is valid or invalid.

Conclusion

In conclusion, automating the deductions management process offers numerous benefits and is becoming increasingly essential for businesses of all sizes. In summary, automating the deductions management process offers numerous advantages and has become increasingly crucial for businesses of all sizes. 

By implementing automated systems, companies can streamline and improve their overall deduction management workflow. 

With HighRadius Deductions Management systems, companies can eliminate the need for manual data entry. This not only saves time but also reduces the potential for errors. Consequently, this leads to improved precision and efficiency in managing deductions. Moreover, it enables real-time visibility into the entire process. Companies can track deductions from initiation to resolution, allowing for better control and faster decision-making. 

If you want to learn more about how HighRadius can help your business achieve these benefits, talk to our experts today.

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