Most accounts receivable (A/R) leaders from the CPG industry in 2022 will be looking for ways to modify their strategies to meet the CFO’s goal of moving from a cash preservation mindset to achieving long-term strategic cash excellence.
One of the most optimal ways for order to cash (O2C) leaders to achieve that would be by minimizing revenue leakage.
The Triad of Revenue Leakage
If a receivable is trapped in a process with disconnected systems, limited internal collaboration, and poor customer experience, the chances of recovering it are very minimal. We call this phenomenon the triad of revenue leakage.
This blog will identify three critical areas A/R leaders must work with their teams to prevent revenue leakage and meet the CFO’s goal of safeguarding the cash flow. This is based on the insights captured from O2C executives Cindy Scott, Senior Manager A/R & billing at Blackhawk, and Mike Thelen, Director, consumer financial services at Land O’Lakes.
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:
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.
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.
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.
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.
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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.