Preventing revenue leakage: Three deduction focus areas on every CPG A/R leader’s checklist for 2022

Three Major Reasons for Revenue Leakage and How Can A/R Leaders Curb It

The inability to properly manage disputes stands out as the primary cause of revenue leakage in most CPG organizations. A/R teams from these companies have to deal with a high volume of non-trade deductions like short payments, and having a team that operates in silos in such a situation can lead to a fractured cash flow.

Let us look at the different issues that stem from a siloed deductions management system:

Money Lost to Invalid Deductions:

A high volume of receivables is lost when companies cannot identify invalid deductions. It may seem like a trivial issue at first since most deductions are of a relatively low-dollar value.

However, when deductions are summed up against all the invoices generated by CPG companies, the net dollar value lost in deductions annually is relatively high.

With the right automation solution, the coverage of deductions and the percentage of recovered deductions could be improved considerably. The time taken to recover an invalid deduction can be reduced by leveraging a streamlined and automated deductions process.

Auto-Approved Write-Offs:

The magnitude of dispute claims that most CPG companies had to tackle in 2020 was sky-high. This was because few customers started using deductions as an excuse to strengthen their own cash flow during the turbulent economic climate.
Due to the huge bulk of deductions, they receive in a day, most A/R teams initiated an auto-approved write-off limit for deductions. This meant that any deduction below a particular limit, for instance, $50, won’t be researched by a deductions analyst and will be automatically considered valid. This led to a few customers often taking undue advantage of the limit set by A/R teams.
Given the high volume of invoices that CPG companies generate, the net sum would be considerable if only A/R departments got to a point where they could research all the auto-approved write-offs.
For example,

Compliance Deductions from Big-Box Retailers:

Many CPG companies also do business with big-box retailers such as Amazon, which has strict compliance regulations for their suppliers to follow. On violating these regulations, big-box retailers claim a compliance deduction, a problem that keeps getting worse with time.
Today, most big-box retailers have sophisticated inbound audit solutions that allow them to track compliance violations from suppliers accurately.
It has also been observed that retailers give suppliers less time to resolve a compliance deduction, while the number of such deductions has been on the rise simultaneously.
The short dispute window results in many compliance deductions not being resolved. This causes CPG companies to lose a lot of money, much of which they would recover if only they could get to perform root-cause analysis and identify the validity of the claims to resolve them faster.

Due to the high volume of deductions in CPG companies, identifying invalid deductions is like finding a needle in a haystack. Deduction teams struggle to identify invalid disputes and end up researching all the deductions. It is a known fact that most deductions analysts spend 100% of their time researching disputes to identify only 10% of invalid deductions in most cases.

Conclusion

Inefficient deductions processes continue to plague consumer goods companies, leaving deductions teams scrambling to find and stop revenue leakage. The key factors to keep in mind while planning a deductions automation project are the business needs, expected ROI, and the robustness of the technology.

Hence it is critical to leverage the right technology in order to fast-track disputes and improve DDO to make a significant working capital impact in the CFO’s office.