In an ideal world, all B2B transactions would be straightforward. Your customer asks you to provide something, you do it, and the customer pays you. However, this is often not the case, especially when your customers are big-box retailers.
The deduction portion of the order-to-cash cycle can result in a significant reduction in the amount you actually collect from your customers. There are many reasons this may happen, from human error, logistical problems, EDI failures, vendor compliance penalties, and legitimate trade allowances and rebates. If your company can’t manage the matching, reconciliation and resolution of this phase of the process successfully, it means that you’re leaving a substantial amount of money on the table. In fact, in the CPG industry as an example, trade allowances alone could constitute up to 20% of revenues and thousands of transactions, a huge opportunity for error.
Deductions take three basic forms
- Agreed to Deductions. Trade promotion deals, cash discounts, markdowns, approved returns. This category represents the largest percentage of deductions taken and has a very high error rate, for example discounts taken after the payment period, or errors on the return.
- Preventable Deductions. This includes process errors, such as unclear trade promotions wording, billing, EDI errors, shortages, delivering late or early, etc. Many of these can be systemic and will continue happening forever unless the root causes are solved.
- Unauthorized or Excessive Deductions, such as trade promotion deductions not meeting the deal parameters, late discounts, customer returns errors, pricing, counting errors. Excessive amounts deducted on otherwise proper deductions are included here as well, including too-high returns pricing, incorrect quantities charged back, etc.
Most, perhaps 80% of deductions are legitimate, but even those that are part of “Agreed to” classification contain errors that in the aggregate create large losses for the manufacturer.
Read on to learn more about the deduction segment of the cycle and how automation can help you keep it in check.
How Deductions Fit Into the Order-to-Cash Cycl
In the B2B realm, the order-to-cash cycle is the framework for converting orders into cash. It begins with your customer placing an order and mutual agreement on terms. After you ship the goods, you submit the invoice. Fifty years ago, your customers would have paid those invoices as submitted and, if they reason for a claim for a credit, they would submit it afterward, which you had time to investigate before issuing a credit memo to be later deducted.
Today, however, the process is deduct first and leave it to the seller to figure out later, and it isn’t a simple procedure. After your customer receives an invoice, they may dispute certain terms, apply a discount, or issue a claim if did not receive the order as written. This leads to issuance of a debit memo deduction and often delays in payment, more work for your A/R department, and a reduction in the revenue you will collect.
In some cases, deductions can be chalked up to mistakes made on either end of the transaction. Perhaps the customer entered the wrong SKU pricing, or you made an invoicing error, your fulfillment center short shipped the order, or shipped late (or early) by a couple of days. There are also cases of deductions taken by customers trying to take advantage of a deal that is no longer available.
No matter reason or validity, deductions put a serious hitch in your cash collections and profits. The time it takes to research the transaction means you have less time to work on regular accounts receivable. Settling these disputes also means you will not receive as much money as you were expecting. This is why intelligent automation can be a powerful tool to help protect yourself.
Smyyth’s Deduction Management Offerings
As a leader in accounts receivable automation and deduction outsourcing, Smyyth offers automated tools for managing your deductions, invoice collections, auto cash application, and other order-to-cash processes. For example, our Carixa Cloud Deductions module utilizes best-practice deduction strategies, AI-and RPA-driven processes, and an easy-to-understand performance reporting , while automating and streamlining your operations for efficiency. With the help of this solution, you can also with a click easily use third-party services to outsource problem categories — such as trade promotions and cash discounts — and automatically audit and recover deductions to recapture your lost profits.
When you choose to automate deduction processing, you can more easily identify the root causes of preventable deductions, reduce the long time it takes to process deductions (Deduction Days Outstanding (DDO), increase your revenues, and more. If you’re ready to learn more about our A/R automation systems and get started, reach out to one of our experts today.