Increase Your Profits by Improving Deduction Management and Processing
December 1, 2022
In an ideal world, your customer buys your goods, you ship them, and the customer pays you. However, the process is way more complicated when your customers are big box retailers.
Deductions result in a significant loss of profits, including claims for returns, shortages, pricing, logistics and shipping, EDI errors, vendor compliance, On-Time In-Full penalties, trade allowances and rebates. For example, trade allowances constitute up to 20% of revenues and many thousands of deductions in the CPG industry. This presents a massive opportunity for finding errors. Deduction categories include:
Perhaps 80% of all deduction claims are approved, but even those that are part of the “Agreed to” classification contain errors. When added together, all these errors create enormous losses for the manufacturer.
In B2B commerce, the order-to-cash cycle is the framework for converting orders into cash. It begins with your customer placing an order and mutually agreeing on terms. After you ship the goods, you submit the invoice. Fifty years ago, your customers would have paid those invoices as presented. If they had a reason to claim a credit, they would submit it after, which gave you time to investigate before issuing a credit memo for future deduction.
However, today’s process is to deduct first and leave it to the supplier to figure out. This isn’t a simple procedure. After receiving an invoice, your customers may dispute specific terms, apply a discount, or issue a claim that the order was not received as written. This leads to the issuance of a debit memo deduction, delays in payment, more work for your A/R department, and less revenue for you.
In some cases, deductions can be chalked up to mistakes made on either end of the transaction. For example:
Without automation software, it’s challenging to keep up with deduction management and processing. Backlogs and write-offs become the norm. For example, you need to handle the complex returns reconciliation between customer debit memos and supplier credit memos at the SKU/NDC pricing level. This can only be accomplished by intelligent technology, automated processes, and workflows.
The recent trend of large CPG companies to offshore manual deduction management processing just exacerbates the losses. It drives down direct labor costs, but reduces the amount of deductions recaptured which is a much larger dollar amount.
Customer deductions are a drain on profits and a strain on resources. The time it takes to research deductions means you have less time to work on regular accounts receivable. Intelligent automation is essential to manage this profit-draining operation. It starts with software that automatically re-classifies deduction reason codes during cash application.
Days Sales Outstanding (DSO), CEI, ADD, and ART are standard performance metrics for cash flow and collection. As deduction management experts, we feel strongly that deductions are unique and need to be measured separately from other receivables metrics. Our expanded metrics help, including:
Deduction resolution represents a huge administrative expense. Remember that you are doing all this work to get your money back from excessive deductions and correct root causes.
This starts with a commitment to a businesslike policy statement and following through to consistently enforce your rules. You have negotiating power and don’t need to accept deductions as a “cost of doing business.” You can’t win them all, but you will be way ahead of many of your competitors that roll over.
Contact us for more information about optimizing your deduction process with advanced Carixa deduction automation software or services.
Interested in learning about more ways to enhance profits? Take a look at our post, Profit By Controlling Revenue and Profit Leakage