Deductions Management Process: What Is It & How to Improve It?

Introduction

Deductions management is a part of accounts receivables and critical to maintaining your cash flow and profitability. Deductions occur when a customer disputes or doesn’t pay the due amount. If it is valid, you must remove the amount from the invoice and issue a new one to the customer.

90% of the time, deductions implied to customers overdue are valid. However, analysts still must research every deduction to be very sure of the amount to be recovered. The traditional manual process to conduct this can be extremely time-consuming and prone to errors.

This is where the AI-driven deductions management process comes into play. It not only helps predict the validity of the deductions but also proactively gathers backup documents, freeing up an analyst’s time to focus on deductions that have a high probability of recovery. In this blog, we will explore everything you need to know about an automated dispute management system. Let’s dive in.

What Is Deductions Management?

When a company receives less payment from its customers than what was expected for unknown reasons, the amount that is not paid is considered a deduction. This deduction might happen due to a variety of reasons such as:

• Damaged goods
• Billing errors
• Shortage in shipment

Companies need to assess their deductions management process to determine the reason and validity of the deduction taken. But, before we dive deep into the details, let us first understand what a deductions management process is.

Deduction Management Best Practices

Customer deductions are a part of the accounts receivable process where a customer refuses to pay and disputes an invoice. These deductions are usually straightforward. For instance, customers may raise a deduction if they were promised a volume discount, but the invoice does not reflect the same.

Dealing with customer deductions requires a lot of research, auto-matching with internal documents, and then checking the validity of deductions. Here are a few deductions management best practices to ensure seamless handling of customer deductions.

• Use KPIs to track deductions
  You must carefully track metrics like day deductions outstanding, deduction volume, and deduction resolution time at regular intervals to detect and mitigate any bottlenecks on time.
• Define workflows
  The deduction process must be robust enough to pursue and maintain all customer deductions so you can respond to them on time. For instance, if a customer is making earned deductions to claim a discount on their purchases, you may have to use a different method to research and validate their deductions than those who make deductions for non-delivery of products.
• Centralizing deduction-related information
  Gathering and researching deduction data manually is a mammoth task. Your deduction management system must make it easy to search and filter deduction data, claim backup documentation, etc., and categorize it based on customer name and reason code.
• Implement an AI-driven deduction management process
  Automating basic workflows is no longer enough to streamline customer deductions. AI will help not only prioritize worklists but also automatch them with trade promotions, send customized denial correspondence, identify the validity of a deduction, and more, so you can focus on what matters most.

What Is the Deductions Management Process?

A deductions management process is the process followed by the accounts receivables department to resolve deductions. It involves validating disputes, modifying invoices, and communicating with customers, and it varies based on the company size, preferences, and software capabilities.

An efficient deduction management process could help a company increase the recovery rate and decrease the time spent in resolving disputes. However, most companies manage deductions manually, and the manual traditional deductions management process is inefficient.

Objectives of the deduction management process

An effective deduction management process must be capable of solving disputes on time, improving customer experience, and reducing day deductions outstanding (DDO).

• Timely resolution of disputes
  You must dissolve disputes on debt collection as soon as a customer raises one on your portal. The more time you spend researching and validating disputes, the more dissatisfied your customers will become, even leading to revoked orders.
• Improved customer experience
  Ensuring a timely resolution is critical to provide a seamless customer experience. You would not want your customers to wait weeks or months after sending supporting documentation to authorize the deduction and get the reissued invoice.
• Reduce any possible impact on revenue
  An inefficient deduction management process can lead to revenue leakage, meaning the uncollected revenue cannot be recovered. It can also become a significant hurdle or offense and cost you millions of dollars lost in cash, thereby impacting cash flows and working capital.
• Reduce day deductions outstanding (DDO)
  Similar to day sales outstanding (DSO), DDO tracks your business’s ability to resolve deductions over a period of time. It determines your ability to identify and resolve deductions.

Legacy Deduction Management Process: How It Works

An effective deduction management process is critical to analyze, monitor, and resolve discrepancies highlighted in a customer’s invoice. You can implement an advanced deductions management system to reduce loss, streamline cash flows, and improve customer relations by resolving deductions as fast as possible. Here’s how a customer deductions management process works.

Step 1: Receiving dispute tickets

An analyst receives dispute tickets from either the client or a deduction claim from the accounts department.

Step 2: Prioritizing claims

The analyst then prioritizes the claims in order of importance, usually based on the deduction value.

Step 3: Gathering data

After the deduction or short payment is identified, the analyst gathers backup information and finds the invoice’s source. Finding the source helps the analyst identify the right stakeholders for the invoice.

After identifying stakeholders, the analyst manually researches and collates all the documents related to the invoice – Proof of Delivery (PoD), Bill of Lading (BoL), order invoice, sales invoice, tax receipt, and other documents related to the order.

Step 4: Requesting for data

In case some information is missing or incorrect, the deductions analyst manually reaches out to the stakeholders and internal teams to gather the required data.

Step 5: Resolving deductions

After collating the documents, the analyst matches different records with the claims document and works on determining the deduction’s validity.

Step 6: Getting approval

If the claim matches certain criteria, the deductions analyst might have to follow up with their superiors to get approval. This takes another round of back and forth and further delays the resolution.

Step 7: Following up with the customer

If the deduction claim is invalid, the analyst sends a manual correspondence to the client informing them about the rejection of the claim request. If the deduction claim is valid, the analyst engages with the client and issues either a credit memo or a debit memo for future use by the client.

Step 8: Syncing changes with ERP and TPM systems

After the claim has been declared valid, the analyst informs the accounts department of the validity of the claim request and asks them to update the invoice into the ERP and issue a credit or debit memo as needed. After this, the client’s account status is closed.

Step 9: Reports

Reports are prepared manually, usually in Excel, which helps the managers and executives understand the performance of the deductions functions. However, creating these reports becomes very time-consuming due to the unavailability of real-time data.

Challenges with the Legacy Deductions Management Process

The deductions management process can be done either manually or with automated deductions management systems. The manual approach involves navigating through a labyrinth of paperwork. You must submit tickets, gather and validate dispute information, check backup documentation, and then resolve claims—a time-consuming and error-prone process.

So, the alternative is to use a well-designed deductions management system that will help you automate data gathering, prioritize deductions, and automate trade promotion matching. However, while these systems help streamline the deductions management process to a great extent, they still lack critical capabilities and struggle to adapt to changes in customer websites. Here are some of the key challenges with traditional accounts receivable deduction management systems:

• Basic worklist
  Most of the deduction process solutions use unproven technology which is in their early stages. They offer limited pre-built integrations built with third-party websites to bring claims data and processes. They are incapable of capturing key pieces of claim information required to identify reason codes, auto-link documents to dispute cases ,and build downstream matching algorithms to utilize and process data. Moreover, they use fragile bots that can easily break when adjusting to the changes to the customers’ websites.
• No functions for deduction validity predictor
  One of the major tasks of a fully automated deductions management process is to enable AI-assisted prioritization so you can predict the probability of a Deduction to be valid/invalid with a confidence score. Moreover, it should also be able to help you to do a quick spot check of deductions and write-offs.
  Unfortunately, this functionality is missing entirely from many renowned deduction process platforms. They use generic solutions that don’t leverage any AR-specific use cases. To build any kind of AI model, you would need a dedicated team of data scientists which is not only expensive but also hard to maintain.
• Lack of deduction auto-matching capabilities
  A good deduction solution will help not only aggregate backup documents but also read through the data from the claim document and use it for auto-matching with trade promotions. It will also allow you to conduct variance analysis for non-trade deductions. You can find out if the items are delivered in adherence to the proof-of-delivery copy and compare it to what was invoiced.

Traditional deduction processes do not offer any in-built functionalities for automatching. To automate this process, your IT team will need to build custom algorithms, which must be rewritten every time the system is updated. Adding to your hassles, you will need to build these algorithms from scratch every time a new customer joins the list.

• No denial correspondence
  Customized denial correspondence is one of the major functions of a deduction management process. You must be able to automatically push denial notices onto customer portals or send emails to customers notifying them. By reaching out to customers on time, you can maximize the chances of recovery for invalid deductions by manifold.

 

Traditional systems or processes don’t have any capability for customized denial correspondence. Deduction analysts have to reach out to customers manually since there are no out-of-the-box features available and you have to manually customize the system, which could take months to maximize the outputs of the AR department.

Leveraging AI for a Seamless Deduction Management Process

An ideal deduction management process goes beyond the basic automated features of prioritizing worklists and automating data collection. To help you get holistic control over deduction management, HighRadius’ deduction management solution offers numerous state-of-the-art features to boost analysts’ productivity and help reduce the negative impact on cash flow and profitability.

1. Automation to predict the validity of customer deductions

Automation helps you analyze all data relating to the Deductions and Invoices and accurately predict the chances of a Deduction being Valid/Invalid. Our deduction management solution comes with an AI Deductions Validity Predictor that uses AI algorithms that look at 20+ variables (Dispute Type, Dispute Amount, Ship to, and others) and 12 months of Dispute Resolution History to identify which Deductions have a high probability of being Valid/Invalid.

For example, companies have approximately tens to hundreds of thousands of open Deductions at any time. Only 3-5% of these Deductions are invalid, but companies must research each Deduction to identify the invalid ones. Thus, the department spends 20X the time identifying these, while the remaining valid ones get a cursory look. The feature helps identify these invalids and maximizes the chances of recovery.

2. Claim backup automation

Claim backup involves aggregating customer web portals and email claims and auto-link claims documents to deductions. The claim backup automation feature automates the aggregation of Deduction backup documents. It usually includes Claim Copies or Debit memos from Customer portals and emails.

For example, John, a deductions analyst, typically spends 30-40% of their time aggregating backup documents necessary for Deductions research. The Claim Backup Automation module completely automates this task and links these documents to the relevant Deductions. The analyst can start working directly on the deductions research process.

3. Deductions auto coding

When dealing with customer deductions, it’s important to understand why a customer is taking a deduction so it can be routed to the right team based on customer name, reason code, etc. Automation here will not only help you resolve deductions faster but also visualize deductions in your work queue on the day it’s created instead of waiting for manual intervention.

The deductions auto-coding feature in our solution leverages over 200+ implementation projects to build a library of reason code identification algorithms to help you easily identify why a customer took a deduction. For instance, Walmart would provide a reason code of 22-25 indicating Shortage-based Deductions.

4. AI-led pricing deduction research

Pricing Deductions occur when there is a disconnect between what was invoiced to the customer versus what the customer feels is the right amount. To resolve this, you need to aggregate claim data from websites and emails to verify the discounted price and match it with internal contract and pricing documents.

Features like pricing deduction research automation identify the price difference between what was captured in ERPs and what a customer is claiming. It then auto matches the discount with internal records with the right price. Our solution uses LiveCube to automate 4-way matches among deduction, claim backup items, sales invoices, and pricing contracts to ensure the validity of the deduction.

5. Trade promotion auto-matching

Businesses run trade promotions to incentivize clients to buy more. Even though these deductions are planned, you need to research all the trade deductions and identify invalid ones. Searching for an invalid Deduction is similar to searching for a needle in a haystack. HighRadius Deductions Management automatically matches customer claims to trade promotions to check the validity of trade deductions.

Our trade promotion auto-matching feature uses a 3-way matching algorithm of trade promotions, claim backup line items, and material/item master. It tags every deduction line item captured from the claim documents as valid/invalid based, on adhering to the right trade fund, amount, and promotion effective dates.

6. Automated workflows and collaboration

Certain deductions may need approvals at multiple levels before they can be resolved. For example, a trade deduction needs to be approved by the salesperson first and then by an AR manager to ensure accuracy when resolving it.

Automated workflows and collaboration in the deduction management process allow you to set up approval matrices. Also, multiple departments can collaborate to share deduction updates and documents via a single platform, bringing efficiencies into the deduction research and resolution process.

7. Proof-of-Delivery (POD) automation

For some deductions like shortages, you need a Proof-Of-Delivery document to validate whether a customer’s claim for deduction is valid. These documents can be automatically aggregated with the help of our deduction management system. Our POD automation tool automates aggregating POD documents from carrier portals, emails, and links to the respective deductions. It also helps identify signed vs unsigned POD documents.

8. Dispute denial automation

Once a team has completed the analysis for a Deduction, for invalid deductions, they need to reach out to customers, either via email or through website portals. Our dispute denial automation feature provides complete correspondence for denial notices. It comes with pre-configured email packages of denial letters to customers and also auto-attaches relevant documents such as POD or Invoice/PO copy based on the deduction type.

In addition, for customers requiring customers to go onto portals and deny claims, our dispute denial tool can automate this with integrated RPA technology for posting data onto customer websites.

Boost Your Deductions Management Process with HighRadius

The deduction management process relies heavily on gathering backup documents, matching to identify validity, and collaborating for documents and approvals. HighRadius makes this process easier by leveraging AI. Our automated deduction management software predicts the validity of the deduction and proactively gathers backup documents using embedded RPA. This frees up 80% of analysts’ time so they can focus on deductions with a high probability of recovery.

• With the help of integrated RPA bots, has built integrations with 1000+ customer and carrier websites/emails to capture back-up documents.
• It uses matching algorithms to identify whether the customer is eligible for a promotion/rebate or not. Similarly, it can perform variance analysis for non-trade deductions such as pricing, shortage, etc.
• HighRadius provides complete correspondence for denial notices, which come with pre-configured email packages. It can also send denial letters to customers with relevant documents.

The result? You can unlock 50% increased net recovery rates and improved deduction resolution efficiency.

FAQs

1) What is deduction in accounts receivable?

A deduction in AR is a decrease in the amount owed by a customer. It arises from discrepancies or issues related to invoices, payments, or agreements. Deductions can include discounts, returns, allowances, or claims for damaged goods and need thorough analysis to determine whether they are valid.

2) What does a deduction analyst do?

Deduction analysts investigate and resolve deductions in account receivables. They identify opportunities to improve processes that will minimize non-promotional deductions, clear them more timely, and play a crucial role in maintaining financial accuracy and customer satisfaction.

3) What is the impact of customer deductions on receivables?

Customer deductions can impact receivables by reducing the amount owed by customers. Not addressing or resolving deductions proactively will not only affect your cash flows but also reduce your profitability. Moreover, it can prolong the aging of receivables, delay collections, and affect financial performance.

4) Why is deduction management important?

Deduction management is important to maintain financial health. It helps identify and resolve deductions swiftly and accurately, leading to better cash flow, reduced discrepancies, and more streamlined operations. It will also improve responsiveness and improve customer satisfaction.

5) What happens if the deduction management process is inefficient?

If the deduction management process is inefficient, it can lead to revenue leakage or wasted revenue that is never recovered, impacting operational efficiency, cash flow, and profitability. An inefficient process can also lead to errors, incorrect deductions, or unresolved issues.

6) What are deductions in OTC?

Deductions in OTC refer to the underpayment of debt due to damaged goods, billing errors, or wrong merchandise. This can be resolved through an effective deduction management process as it ensures timely collection of payments without straining customer relationships or the bottom line.

7) What are the stages of deduction?

The stages of the deduction management process look like this:

• Receiving dispute tickets from customers.
• Prioritizing claims based on reason codes and response time.
• Gathering and requesting data from internal teams
• Resolving deductions and communicating them to customers.
• Syncing the resolution on ERP and TRP systems.