Mastering Deduction Resolution: Industry-Specific Challenges and How to Overcome Them

19 May, 2023
9 min
Crystal Crawford, Associate Director, Talent Acquisition

Listen to the blog:

10:42 min

Table of Content

Key Takeaways
Introduction
Navigating the Deduction Resolution Process: Step-by-Step Guide
Top 5 Industry Challenges Businesses Face in Deductions Resolution Management
Unlocking Cash: Overcoming Deduction Resolution Challenges
Setting Up Deduction Management with HighRadius

Key Takeaways

  1. Recognize the impact of an effective deduction resolution process on recovery rates.
  2. Explore industry-based challenges and strategies to tackle them.
  3. Discover how a tech-forward dispute strategy can narrow your business’s write-off rate.
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Introduction

Navigating the intricate landscape of deduction resolution can be daunting, especially for growing companies grappling with the sheer complexity of deduction management.

Deduction resolution is a critical aspect of the accounts receivable process, as it considerably impacts an organization’s revenue and financial health. Accurately forecasting revenue becomes a formidable challenge when customers partially pay their bills. Recent research highlights that customer deductions can account for 5% to 20% of a company’s gross revenues. Astonishingly, even if a mere 10% of these deductions are unauthorized, a $1 billion company could lose millions of dollars in profit.

Hence if left unchecked, this can lead to mounting bad debt and dwindling deduction recovery rates, posing significant roadblocks to a business’s growth and cash flow.

In this blog, we’ll delve deeper into deduction resolution, investigating various industries’ common challenges and exploring proven strategies to overcome these hurdles.

Navigating the Deduction Resolution Process: Step-by-Step Guide

Deduction resolution is a vital balance that ensures the accurate settlement of general accounts and fosters healthy business relationships. The process typically comprises several stages:

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Identify and Validate Deductions:

This initial step requires verifying the legitimacy of the deduction and understanding its impact on the business. It involves reviewing the deduction claim, checking its validity, and cross-referencing it with contracts, invoices, and other related documents across sales and customer service teams.

Relevant Tracking Indicators: Deduction volume, valid and invalid deduction ratio, and root cause analysis

Gather and Organize Supporting Documentation:

To resolve a dispute, it’s essential to collect relevant information such as invoices, contracts, agreements, and any other supporting documentation. This stage ensures that you have a solid foundation for your case, and can expedite the resolution process. Finance teams often work with the logistics department and account managers to obtain these documents. Examples of documents required in this stage include:

  • Invoices and credit memos
  • Payment remittance advice
  • Proof of delivery or receipt
  • Dispute correspondence
Relevant Tracking Indicators: Average time taken to gather supporting documents and the percentage of cases with complete documentation

Communicate and Negotiate with Stakeholders:

Effective communication and negotiation are key to resolving deductions. This stage involves collaborating with internal teams, clients, or suppliers to discuss the deduction, present supporting documentation, and negotiate a fair resolution.

Relevant Tracking Indicators: Deduction resolution rate and customer and supplier satisfaction

Resolve Disputes and Reconcile Accounts:

Once an agreement is reached, the final step involves making necessary adjustments to the company’s financial records, such as updating the general ledger, accounts receivable, and other relevant systems.

Relevant Tracking Indicators: Deduction resolution time, deduction recovery rate, and the cost of processing deductions

Top 5 Industry Challenges Businesses Face in Deductions Resolution Management

Different industries face unique challenges regarding deduction resolution in their receivables process. At HighRadius, we’ve always kept our ears close to the ground and are constantly learning from 100s of finance leaders we speak to. Here are some insights:

CPG (Consumer Packaged Goods) Industry:

CPG businesses often grapple with a high volume of deductions due to complex promotional programs, leading to increased disputes and financial discrepancies. This can strain resources and make it challenging to manage and resolve deductions promptly. A major challenge in the CPG industry is the need for more standardization of identification codes, which can make it difficult to track and validate deductions.

Manufacturing Industry:

Manufacturers face inadequate documentation centralization and data silos, making validating claims and reaching a resolution difficult. This often results in prolonged disputes and negatively impacts the company’s cash flow. Manufacturing businesses heavily rely on gathering documents such as bills of lading, shipping documents, and quality control reports to support their deduction resolution efforts.

Logistics Industry:

Companies in the logistics sector need help with a single source of truth for communication and collaboration, which can delay and complicate the resolution process. This can lead to mounting frustration and strained relationships between the parties involved. Logistics companies often require documents like proof of delivery, freight invoices, and carrier contracts to resolve disputes effectively.

Healthcare Industry:

Healthcare organizations face the challenge of manual and time-consuming processes when it comes to deduction resolution. This can hinder efficiency and lead to an increased likelihood of errors. In addition, the healthcare industry has to deal with many regulations, adding another layer of complexity. Documents that may be necessary for the resolution process include insurance claim forms, explanation of benefits (EOBs), and medical billing statements.

Technology Industry:

The technology industry often experiences a high volume of deductions across global regions, making it difficult to manage and resolve these deductions efficiently. The global nature of the industry requires businesses to adapt to varying regulations, currencies, and languages, adding complexity to the deduction resolution process. By understanding these challenges, businesses can develop targeted strategies to overcome hurdles and improve their deduction resolution processes.

Unlocking Cash: Overcoming Deduction Resolution Challenges

Identifying and resolving deductions can be a time-consuming and tedious process. However, businesses can overcome these challenges and streamline their deduction resolution processes with the right tools and strategies. Here are some proven solutions that can help businesses overcome their deduction resolution challenges:

Leverage an Automated Deduction Management Platform:

Once businesses have analyzed their current deduction resolution process and identified areas for improvement, they can integrate an automated deduction management platform with their ERP (Enterprise resource planning) and TPM (Trade promotions management). This can reduce the time taken to identify and resolve deductions and improve efficiency. When considering a platform, look for features such as:

  • Automatic data collection and linking: The platform should automatically extract data such as promotions and commitment data from TPM, claims, and POD documents from EDIs, emails, paper-based copies, or customer portals, and link them to the relevant documents, reducing research time.
  • Deduction validation using AI: Once the data is collected and auto-matched to the deduction, AI can validate the deductions, reducing the analyst’s intervention (unless there is a case of exception). The deductions can then be either approved or denied.
  • Creation of a prioritized worklist and deduction resolution: The platform should create a prioritized worklist containing open deductions along with recommended steps to be taken, helping the analyst focus on high-priority tasks. The deductions analyst can then validate them, ensuring faster resolution cycles and faster recovery.

Implement a Standardized Deduction Resolution Process:

A standardized deduction resolution process ensures consistency and clarity across the organization, reducing the likelihood of errors and miscommunication. This process should be clearly defined, documented, and communicated to all stakeholders involved in the deduction resolution process.

Foster Collaboration among Internal Teams and External Stakeholders:

Collaboration is key to effective deduction resolution. Finance teams must work closely with sales, customer service, logistics, legal teams, clients, and suppliers to ensure smooth communication and negotiation. Encourage open communication and provide clear guidelines and expectations to all parties involved in the deduction resolution process.

Setting Up Deduction Management with HighRadius

Businesses can streamline their deduction resolution process by integrating their existing tech stack with HighRadius Dispute Management Software. This software can help businesses proactively manage their deductions by standardizing and automating processes. Here are some ways in which HighRadius Dispute Management Software can benefit businesses:

  • Auto-capturing proofs of delivery (PODs) and bill of lading (BOLs): The software automatically captures these documents from emails and customer portals, reducing research time and ensuring accurate data entry.
  • Streamlining communication and approval processes: HighRadius Dispute Management Software creates collaboration and approval workflows, streamlining communication and approval processes. This ensures that all stakeholders involved in the deduction resolution process are on the same page, reducing the likelihood of miscommunication and errors.
  • Automating deduction correspondence: The software automates deduction correspondence and sends the data back to customer portals, reducing manual intervention and improving efficiency.

One example of a successful integration of HighRadius Dispute Management Software is Hershey’s, one of the world’s largest chocolate manufacturers, with customers in over 70 countries and 7 manufacturing branches worldwide. The company wanted to establish a uniform system and a single source of truth for all stakeholders to ensure faster resolutions. By integrating HighRadius Deductions Management Solution with their Trade Promotion Management System, Hershey’s achieved a 70% reduction in the number of Kroger deductions that needed manual efforts and a 40% reduction in the concentrated open deduction dollar value.

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This successful integration enabled Hershey’s to streamline their deduction resolution process, reduce manual intervention, and improve efficiency, leading to better cash flow and financial performance.

In conclusion, effective deduction resolution management is crucial for businesses looking to improve cash flow, maintain healthy financial performance, and protect their bottom line. By taking action and embracing these best practices, discussed in this blog, businesses can overcome the various dispute challenges and streamline their deduction resolution process.

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HighRadius Deductions Software acts as a powerhouse for proactive deduction management to prevent bottom-line erosion. It provides automation, process standardization, and a platform for cross-departmental and customer collaboration. It supports deduction management by providing some key features like back-up document capture which captures deduction data from customers and supplies the information required for resolution; auto-capture proofs of delivery (PODs), bills of lading (BOLs) from carrier portals & emails; structured deduction resolution, collaboration & approval workflows to streamline the communication and approval process; along with automatic deduction correspondence, and automatic data push to customer portals. The result is a proactive deduction management operation that recovers revenue normally lost to invalid deductions.