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Does Inaccurate Deductions Identification Adversely Affect Your Business?

25 March, 2022
9 min read
Crystal Crawford, Associate Director, Talent Acquisition
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What you'll learn

  • Understand the challenges of manual deductions process in accounts receivable
  • How failure of deduction identification impacts business revenue?
  • Learn the benefits of implementing AI-enabled automation in the deductions management process
What are the probable deductions customers claim?
What happens when deduction identification fails?
How does the manual deductions process hinder efficiency?
Mechanism to accurately monitor deductions
How HighRadius Helps
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What does deduction mean in the context of accounts receivables? Deduction denotes the amount reduced by the customer from the invoice amount due. Deductions can occur due to many reasons; both genuine and controversial. For instance, quantity, quality, or timeliness of delivery is a common reason. In other cases, there could be additional factors.

Deduction in accounts receivables is not new. However, businesses in the manufacturing, food, wholesale, and distribution industries encounter these frequently. A customer may opt for a ‘deduction’ when paying an invoice for a variety of reasons. Sometimes customers also take the deduction based on their own business policy and procedures. Deductions are the most difficult type of open item in accounts receivable to resolve because of their cross-departmental dependency.

Deductions resolution is a critical process in the accounts receivable process because it directly impacts the organization’s revenue. When customers pay their bills partially, it becomes challenging to forecast revenue. Recent research shows that customer deductions incorporate 5% to 20% of the company’s gross revenues. Even if 10% of these AR deductions are unauthorized, a $1 billion company will be losing millions of dollars of profit.


The process of deduction resolution may sometimes involve communication with teams in the sales, accounting, operations, shipping, or logistics departments. In addition to the time spent by your own AR team, customers also get frustrated by incorrect invoices, and the time taken to handle the negotiations by their own teams. An inefficient deductions management process severely impacts customer satisfaction. Hence, identification and resolution of valid deduction should be attended to at the earliest and with utmost efficiency.

What are the probable deductions customers claim?


Earned Deductions

Earned deductions are provided by the supplier to the customer based on certain parameters. For example, trade promotion, ‘early pay discount’ or sales discount. These deductions are a part of the normal course of business and are the most common deductions.

Claims Deductions

Claims deductions are when the customers pay a portion of the invoice and raise a dispute (for example damaged goods or shortage in shipment). The organization then takes up the deduction on its payment if found to be valid.

Error Deductions

Last, but one of the most common reasons for deductions is simply because of an innocent mistake. This happens, especially when organizations follow manual deduction management processes. The types of deductions in this case include:

  1. Preventable Deductions – The AR team encounters these deductions in case of confusing trade promotions, errors in billing, EDI errors, shortages, or in case of early or late delivery.
  2. Unauthorized Deductions – These occur when excessive amounts are deducted. For example, a violation in the deal parameter of trade promotions leads to double deductions. Late discounts, customer returns errors, pricing, counting errors also fall under this category.

What happens when deduction identification fails?

As mentioned earlier, the deduction identification and resolution is a crucial process since it has a direct impact on an organization’s cash flow. Disputes in account receivables aren’t merely an inconvenience but damaging to functional costs and company time. Thus, they must be identified and resolved in an efficient manner. Research conducted by Genpact showed that 14-16% of deductions are invalid. The research also stated that  5% of deductions are unresolved and written off. Dispute management eats up 25-35% of the total order to cash effort, which has a considerable impact on the cash flow.


How does the manual deductions process hinder efficiency?



There is no doubt that manual deduction management is time-consuming and tedious. It requires a lot of analysts to go through the task of aggregating backup documents such as claims, PODs from carrier portals, customer’s accounts payable (AP) portals, Trade Promotion Management (TPMs). A chunk of the analyst’s productivity gets used up even before they start to research and validate the deduction. It not only delays the overall deduction resolution cycle but also hampers the analyst’s productivity.

Poor Visibility

According to an Attain Consulting survey, a $1bn+ organization potentially loses out on $4m annually from invalid disputes which are not recovered on time. Since the entire process is manual, a large number of open deductions go unnoticed and are eventually written off.

Lack of Precision

Manual deduction processes are error-prone since the team needs to manually identify the invalid disputes from 1000+ deductions every day which is equivalent to finding a needle in the haystack.

Poor Customer Experience

Lack of structured collaboration, multiple communications with customers, and longer approval cycles for deduction resolution leads to a dent in customer experience. Eventually, this will result in the downfall of a business.

To overcome these problems, switching over to a modern deduction management process will benefit the organization. It will improve workflow, bring visibility, and ensure efficient usage of the analyst’s time.

Mechanism to accurately monitor deductions

Once you have conducted a thorough analysis of your current deduction mechanism process and identified areas of improvement, you can level up by leveraging a smart platform. Integrating an automation solution with your ERP (Enterprise resource planning) and TPM (Trade promotions management) helps shorten the time taken to identify and resolve deductions. Consider a platform that offers:


Automatic data collection and linking

It is a solution that automatically extracts data (promotions and commitment data from TPM); claims and POD documents from EDIs, emails, paper-based copies, or customer portals and links them to the relevant documents to reduce the research time.

Deduction validation using AI

Once the data is collected and auto-matched to the deduction, they can be validated with the help of AI reducing the analyst’s intervention (unless there is a case of exception). The deductions are then either approved or denied.

Creation of prioritized worklist and deduction resolution

A prioritized worklist contains the open deductions along with the recommended steps to be taken to help the analyst focus on high-priority tasks. The deductions analyst can then validate them to ensure faster resolution cycles and faster recovery.

How HighRadius Helps

Integrate your ERP with  Highradius Deduction Management Software, and proactively manage your deductions. The software standardizes and automates processes by:

  • Auto-capturing proofs of delivery (PODs), bills of lading (BOLs) from emails and customer portals
  • Streamlining communication and approval process by creating collaboration and approval workflows
  • Automates deduction correspondence and sends the data back to customer portals.

The result is a hassle-free deduction management operation that helps recover revenue normally lost due to invalid deductions.


It’s quite natural for accounting teams working on thousands of deductions every day to miss the lower value deductions. There is a significant investment of time involved to research, follow up, and close deductions, even for low-value amounts. The longer and more time-consuming the deduction process is, the less steady and inconsistent the cash flow of that company will be. The longer it takes to resolve, the higher chances of not recovering the full invoice amount leading to an increase in DSO (Days Sales Outstanding), which can become a burden to grow a business and invest further.

There’s a famous saying in business: “Revenue is vanity, profit is sanity, cash is king.” Who doesn’t desire a positive cash flow in a business? But, failure to recover your invoice amount on time will have a negative impact on your business and over time, this will lead to the business incurring huge losses.

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