Deductions Metrics that Matter: Plug The Revenue Leaks

Deductions can take away 10% - 20% of your revenues. That's a substantial chunk! Discover how managing and resolving them vary across industries.

Ever had that feeling when you see deductions on your invoice and think, "Eh, it's just a tiny fraction. No big deal!"?

Well, think again because those 'tiny' deductions can silently siphon off millions of dollars from your bottom line.

In fact, the average deduction value processed by big-shot enterprise companies in the US is a humongous ~$22 million* per month.

Let's delve into the numbers to reveal just how much these 'silent' and 'slow' revenue killers are costing businesses.

Deductions impact 10% - 20% of your revenues

Deductions value is the total amount of dollars disputed or shaved off from the invoice amount by the customers. Not all of this might be legit.

Legit or valid deductions include discounts, chargebacks, trade promotions, etc. Almost 90% – 95% of the deductions’ value is legit and only about 5% – 10% of it is invalid. According to the Credit Research Foundation, deductions can range anywhere between 10% – 20% of your revenue.

The deductions dollar figure depends upon your industry and the trade promotions they run.

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On average, enterprise businesses (> $1 billion revenue per year) process deductions claims to the tune of $21.9 million every month. For small and mid-size businesses, this figure will be much lower.

Here’s an industry-wise look at deduction volumes for enterprise businesses.

Deduction requests have increased YoY

Deduction volume is the number of deduction requests processed by a company. Studies suggest that 5% – 15% of all invoices are affected by deductions, and about 85% of them are usually valid cases.

Enterprise businesses, on average, receive ~11,000 deduction requests every month. This value is much lower in the construction, finance, and service sector industries.

Here’s an industry-wise breakdown of the deduction volumes.

0.1% of all deductions value is written off automatically

Do your customers often pay invoices after rounding them off to the lower side? It can be frustrating. If the invoice is for $1,006, and the customer just pays $1,000, you’re losing $6. This is short-pay.

Chasing the small amount that is reduced due to rounding is going to cost you more than the deduced amount itself. You might just write it off as a ‘minor’ loss without second thoughts. 

87% of enterprise businesses automatically write off at least some dollar value.76% of them auto-write off up to $100 as short pay.

Smaller businesses generally tend to write off $10 – $25 while large firms (> $500 Mn) may even write off up to $500 per invoice, depending on the industry.

By dollar value, enterprise companies, on average, auto write off ~$26,300 per month. 

Here’s a look at how much, on average, businesses in different industries lose to auto-write-offs(see table).

It takes more than a month to resolve disputes!

Deductions and disputes aren’t usually straightforward. They take many rounds of discussions between the business and the customer to resolve.

But the longer they stay open, the more difficult and costly it becomes to collect invalid deductions and apply the cash. 

Our analysis reveals that businesses, on average, take more than a month (41 days)to resolve deduction disputes. But it varies from industry to industry and is higher than average for entertainment, pharmaceuticals, and electronic industries.

44% of businesses do not define any time frame by which deductions should be resolved. For these businesses, the deductions will remain open till they are resolved. Smaller businesses (<$500 million revenue) are more likely to follow this approach compared to larger companies.

About 20% of both small and large businesses will allow deductions to be open for up to 12 months before writing them off.

Who manages deduction claims?

Managing disputes and deductions is a challenge for 55% of B2B finance departments. 

AR / credit teams predominantly handle the research and validation of all deductions. Sales teams are involved if it’s a trade-related deduction (e.g. discounts, promotions, etc.) and the compliance and customer service group if it is a non-trade deduction.

Irrespective of who’s involved in validating the deductions, 82% of companies report that the credit/accounts receivable team is responsible for following up, collecting, and resolving deductions.

How productive are your deductions analysts?

Deductions team productivity is measured by the number of open deductions or disputes that an analyst resolves per day. 

On average, 20 deductions are resolved per analyst per day. This figure will be smaller for SMBs (our sample size was predominantly enterprise businesses).

The average deductions resolved per analyst is higher among B2B industries such as manufacturing, wholesale distributors, and high-tech & electronic.

Conclusion: Benchmark and track your deductions for improved efficiency

Balancing the art of approving legit deductions while forgiving those tiny short payments is crucial for winning the customer relationship management game.

However, you must keep meticulous track of all deductions. Are there certain customers who consistently make short payments that are automatically written off? What trade promotions are most popular among customers? 

These questions warrant close examination. You can get answers to these and more by tracking the deductions and benchmarking the metrics against some of the values we discussed in the previous sections.

Before we wind up, here are three quick tips to help you manage deductions.

1. Focus on timely review and follow-up of deductions to reduce aging and bad debt. 
2. Strengthen cross-functional collaboration and data sharing between sales, finance, and other teams to resolve deductions faster.
3. Auto-match and clear trade deductions during the cash application phase using fully automated accounts receivable systems to save time and effort.

*We have analyzed deduction metrics achieved by customers post the automation of their deductions and claims management processes.