I think everyone would agree that customer deductions have become a major issue for many companies in a variety of different industries. There have been a lot of studies done over the years clearly showing that “Deduction Management” has become a major component of the overall Receivables Management process. These studies have further shown the negative impact that deductions have on a company’s resources and profitability. I would argue however that to get a true picture of the real impact to a company it is critical to understand the composition of their deductions. As the above heading indicates…All deductions are not created equal.
In fact, in some cases, a deduction has the potential to be an efficient form of financial settlement!
Deduction challenges vary significantly by industry. Based on various surveys and studies, the Consumer Products Industry appears to have the highest deduction volume, and that is driven by Trade Promotion Deductions which can represent as much as 90% of the total dollars. In most companies, the vast majority of those Trade Promotion deduction dollars (~95%) are valid and don’t represent a true receivable that can be collected. Instead, these deductions are valid expenses that haven’t been properly accounted for. If we focus on better understanding and improving the overall Trade Promotion process we might be able to show how a deduction can be more efficient and less expensive than a payment to the customer for their claim. In most organizations, this would require a pretty significant paradigm shift.
The two most common ways that trade promotion dollars are delivered to customers are:
- Case rate off-invoice – Allowance is given on the invoice for certain products during a specific period of time
- Bill back – Customer bills back the vendor upon completion of agreed-upon performance
- Customer deducts if payment not received within their terms
- Many customers deduct immediately as part of their process to avoid the costs associated with maintaining an A/R and to get their money sooner
Historically, many of us have spent an inordinate amount of time attempting to work with customers to get them to not deduct by committing to pay their claims within terms or by trying to secure terms from customers who normally deduct automatically. In some cases, pre-payments have even been made to avoid the “dreaded deduction.” These initiatives have had very limited success. In some cases, they’ve resulted in more inefficiency in situations where a payment is made to a customer and the customer still deducts because of some disconnect within their organization which is understandable since they are being asked to deviate from their normal process. Now the deduction becomes a true A/R collection issue and more time and resources are required for resolution.
Trade Promotion Deductions – Embrace as an efficient form of settlement
Although “off-invoice” may be the most efficient way of delivering promotion dollars from an administrative standpoint, it may not be the most efficient from a selling strategy perspective and therefore customer deductions for bill back promotions will continue to be a part of the financial settlement process. If you buy into this assumption why not re-deploy your team’s time and energy to focus on working with the customer and appropriate parts of your organization to streamline, simplify and automate wherever possible and embrace the promotion deductions as an efficient form of settlement. Here are some things to consider:
- Know your customers!
- Document when and where they send their claim backup and evaluate whether any changes are warranted to streamline the process.
- If customer backup is obtained from a website, know and document when that backup is available.
- Do they deduct immediately following the end of a promotion or do they give terms before deducting?
- Perform root cause analysis by developing process maps for the entire promotion payment process to identify where breakdowns are occurring that cause delays in deduction resolution. i.e. – Missing plans, delays in proper coding of deductions, and missing support documentation can all delay resolution so it is important to understand what is driving the issues.
- In addition to your current deduction management KPI’s, establish meaningful KPI’s specific to Trade Promotion deductions.
- Educate stakeholders on the importance of understanding the composition of outstanding deductions as well as the KPI’s noting that not all deductions are “bad” and therefore should not represent areas of concern. i.e. – If trade promotion spending in your organization is up and as a result trade deductions are up that should not represent an area of concern as long as the resolution is occurring in a timely manner.
Overall deduction management has historically been a very labor-intensive process and Trade Promotion Deductions are no exception. Recent breakthroughs in technology, however, are providing more opportunities than ever to automate parts of these processes, especially in the Trade Promotion area. The potential leverage automation to streamline the process helps make an even more compelling argument that deductions can be an efficient form of settlement. These automation opportunities can have a tremendous impact on productivity and cost reduction. The technology that enables this automation will be the subject of a future blog.
To learn more, download HighRadius’ whitepaper on “Automating Deductions Research
What is your biggest challenge with deductions?