Minimizing Deductions: How E-Business Applications Are Helping Companies Collect Faster

By Veena Gundavelli


Abstract
By incorporating e-business concepts into deductions management, companies are able to process deductions more efficiently, thereby lowering DSO and improving customer relations.

A deduction is the hardest type of open item to resolve in accounts receivable because of the complexity of the involvement needed from other departments of a given company. Effective and timely resolution of customer can contribute significantly to reducing the carrying costs of receivables and can lead to eliminating cash flow bottlenecks.

Deductions are increasing in number in most organizations as customers are becoming increasingly aggressive questioning the level of service of their suppliers. As the economy becomes more turbulent, customers are becoming more apt to dispute vendor invoices and deduct the amount in question from their payments.

Deductions also reflect a breakdown of internal processes that is typically cross-departmental. Deductions issues consume a lot of resources and can potentially damage customer relationships, and needless to say, impact cash flow as well.

Companies with a proper handle on deductions resolution and that take an aggressive stand in managing deductions have a competitive edge over their peers in managing their profits.


Problems in deductions management
Between 75 percent and 80 percent of the deductions, in general, a company processes are due to internal causes and can arise from any part of the organization. There are numerous reasons why a customer might short-pay an invoice, including:

• Defective merchandise;
• Transportation claims;
• Returned goods;
• Promotional allowances;
• Billing errors;
• Discount problems;
• Pricing;
• Short shipments;
• Unearned discount;
• Unpaid freight;
• Advertising allowance;
• Prompt payment allowances; and
• Other Miscellaneous reasons.

Handling of these transactions using traditional methods of interaction such as telephone follow-up, faxing paperwork, emailing information etc., with other departments can be laborious, ineffective and time consuming. Studies have shown that some deduction analysts spend up to 75 percent of their time on administrative activities involved in the follow-up.

In most organizations today, deductions are recorded on paper-based forms which are then copied, faxed and distributed to external departments, typically sales or marketing departments that are involved in the resolution. The internal departments, such as sales or other departments are expected to be responsible for resolving and arriving at proper closure for each deduction issue. Paper is the medium for getting information back and forth coupled with emails and telephone follow-ups.

It is important to understand the nature of deductions management processes. First of all, deductions management process, by its nature, is complex because every individual deduction can exist for a different reason and may need to be handled differently. A deduction for damaged-goods is handled with the manufacturing department, while a deduction for a promotional rebate is handled with the marketing department.

Secondly, the complexity multiplies with the need for effective involvement of other departments to help in proper resolution. The collaborative nature of the process, involving orchestrating multiple parties for effective and timely resolution, often is the challenge.

Thirdly, sharing information regarding the deductions becomes key for keeping all parties in sync with the problem. Paper-based forms often present a huge challenge in sharing information and slows down the processes to a great extent. Other disadvantages, such as lack of visibility into how far the deductions are in the resolutions process and lack of knowledge about root causes, are major problems with manual, paper-based processes.


Collaborative Finance: A boon for deductions management
In the last few years, e-business concepts have become universally accepted, and created a tremendous advantage in speed, efficiency and cost of operations by replacing manual, paper-based processes with electronic processes. E-business solutions address the gaining control on 1) information gathering and sharing 2) complexity in business processes 2) collaboration with multiple parties.

Supply chain processes have taken the lead in e-business automation. However, organizations cannot have the necessary competitive advantage unless the cash flow processes take a leap forward. Finance departments with accounting, credit, collections, treasury and other functions have been traditionally been back-office departments, and remained that way in a majority of the organizations. E-business adoption by finance departments, collaborative finance, can increase efficiency in cash flow processes and can enable better profitability.

Using e-business tools to manage core components of working capital, such as receivables, deliver significant advantages in the control of and visibility into cash inflows. Automation of credit and collections functions can significantly improve collections, control of deductions, reduce DSO and can have a great impact on the bottom line. Deductions management is an area that is well suited for e-business applications.


Core Content: Getting a grip on Deductions Information
Information and content is the fundamental core of any process management. Proper gathering and sharing of information form the premise of efficiency in process management.

Deductions information is core of deductions management. Consistent and complete information recording of all relevant information about the deduction is highly critical for proper and timely resolution. Modern deductions management systems enable electronic forms for capturing deductions information. Forms allow consistent information to be filled out each time and most importantly, attach a reason code to the deduction.

A first step to streamlining the deductions process is to consolidate and organize all information about customers, their interests, their buying behavior etc. In order to be effective, the deduction information database must be able to receive from and send information to accounts receivable, invoicing, trade funds and general ledger. The information gathered should be disseminated to all the concerned departments within the organization and also to the external interested parties, including the customers. Without this integration, it will be very difficult to maintain accurate records and keep accounts current.

Once the information is gathered, documentation usually becomes the critical factor. The collector or deduction specialist must be equipped to disseminate this information to both the internal and external parties, and then follow-up with decision makers until the problem is resolved.


Analyzing a Deduction
In analyzing deductions, it is useful to determine first whether the deduction is due to an initial misunderstanding by the customer or to dissatisfaction about the value of the product or service or for any other reason. Categorizing deductions into proper reason codes is the most important step towards efficient management of deductions.

With e-business capabilities, deductions management applications can provide electronic forms for gathering consistent information when a deduction is created which include proper reason code, deduction amount, associated invoice and/or other transactions. These systems also enable attachments of relevant documents needed for proper deductions management such as invoices, sales order, contracts, etc. Having such documents handy at the desktop greatly speeds the analysis of the deduction and ultimately, arrival at a proper resolution recommendation. To summarize, the key advantages of modern e-business deductions management systems are:

• Electronic deductions forms for capturing complete and consist information on deductions and enable enterprise-wide sharing
• Electronic document attachments of all relevant documents needed for better deductions analysis such as invoice images, sales order images etc.

Eliminating the Root Causes
The goal of deductions management should be to identify and help correct the causes of deductions rather than simply increasing the efficiency of processing deductions. Root cause analysis is an essential component of a deduction management solution. Problem tracking also makes recurring problems more obvious. Quantitative data that identifies sheer numbers of deductions and the reasons for them are the first step.

By identifying, correcting or eliminating these breakdowns and weaknesses, a company can measurably reduce the volume of deductions clogging their collection process. By embracing automated systems and quality-driven processes, a company can increase its capacity to resolve deductions and speed the time in which deductions are resolved.

Using such reason codes companies can get extensive analysis on the root causes of deductions. Reason codes also enable companies to process the deductions with the right department or staff with a way specific to that deduction.

The information that is gathered by deductions management software enables an organization to identify the problem areas such as the weaknesses with its internal systems. Several questions will be answered when analyzing such data:

• What is the volume of transactions that is tied up in deductions under different categories?
• What is the dollar amount of accounts receivables typically held up with deductions falling into these different categories?
• What preventive steps is the organization taking to prevent future occurrences of deductions in each category?

Collaboration is key: Leveraging an e-business environment
In e-business, collaboration describes a process of information sharing via electronic means. Collaboration in an e-business environment provides significant efficiency advantages that traditional methods of communication and teamwork cannot achieve. Collaboration is enabled by the creation of a shared space, such as an application, where collaborators can have access and interaction with each other. These shared spaces usually permit real-time access by all collaborators, serving as both a model and a road map. They are essential as a technique for managing conversational ambiguity, serving as a touchstone for the act of collaboration.

The benefits of using collaboration technologies can be quite significant. Product quality improves by bringing together people involved in the decision process and providing fast, efficient communication. Also, companies can significantly reduce costs by eliminating travel expenses and the lost productivity associated with frequent meetings. Most importantly, it saves time by allowing people to resolve problems quickly.


Collaborating effectively with Other Departments
Financial transaction settlement involves collaboration with customers and with other departments, such as sales, customer service, as well as with trading partners. The need for finance departments to adopt the collaborative model of handling financial transactions is very apparent. While credit and A/R departments often are charged with the responsibility of deduction resolution, it is not within their control to cure the underlying problems causing them. Areas such as sales, customer service, distribution, traffic, quality, production, etc., must become accountable for their mistakes.

It is important to establish consistent collaboration for deduction resolution involving the right departments and staff. This sets the expectations for the people involved and drives responsibilities. In some companies, deductions resolution follows collaboration rules such as:

• Addressing the deduction with a team effort of sales and credit personnel.
• Requiring all staff to get approval for a deduction by a centralized supervisor or branch manager to foster continuity in handling such cases.

With e-business deductions management solutions, information sharing with other departments simply becomes sharing electronic documents, notes and interactions through the application with all relevant departments such as sales, customer service etc. If a deduction arises due to a promotional rebate, the deduction analyst can immediately notify the sales and marketing departments to validate the claim and give the recommendation on proper resolution. The marketing staff can get immediate access to all the relevant deductions information, all associated documents such as invoice, contract etc., and can then respond back with a proper recommendation to the credit department. The credit department can do relevant adjustments and can store the electronic interaction for the record and audit purposes. At any later stage, if the customer or sales or deductions analyst wants to see what exactly happened on this deduction - how it was resolved, who was involved, dates and times of interactions etc., he/she can now retrieve the data from the deductions management system with no effort. This is a very powerful collaboration-enabling and collaboration record keeping functionality that modern e-business deductions management systems offer.

With proper collaboration rules established, companies can keep track of when and why a credit has been issued, when and why a chargeback has been issued, when and why a discount has been denied, who from sales or marketing has given approval for the credit adjustment etc. Such information also can be used to understand past history on deductions with customers and helps to better service them.


Process Streamlining: Managing Complex Deduction Resolution Processes
Deductions can be due to number of reasons such as pricing issues, bad quality issues, shipping and freight issues, unearned discounts and various other reasons. Every deduction needs to be resolved in a unique manner involving the relevant departments. Once the deductions are broadly categorized, companies can define processes for resolution for each such type as guidelines for deduction analysts as well as the relevant department involved.

The problem with manual paper-based operations for deductions resolution is 1) ensuring the processes are followed consistently as soon as the deduction is created 2) keeping track of the deduction in the resolution process of how far along it is to closure and who is currently handling it. The problem immediately translates to the efficiency of deductions management and timely resolution.

Modern e-business deductions management solutions deliver powerful workflow capabilities to handle complex processes. One can define a workflow in this way: Once a deduction for advertising allowance is created, the deduction should be sent to Joe Smith in marketing for doing research and gathering more qualifying information for the deduction. If the deduction is valid the deduction should be sent to Brad Henson, marketing manager for approval and then to be sent to Kathy Lee in credit for adjustment. Unique workflows can be defined for every deductions category and the responsibilities of the people involved can be well defined.

Once the workflows are defined, the deductions management systems, ensure that these processes are consistently followed every time a deduction is created under the category. This helps in managing complex work flows involved in deductions resolution. There are several advantages to such workflow-defined systems

• Processes can be well defined and can be ensured that they are consistently followed.
• Processes set the right expectations on the roles and responsibilities of the people and departments involved in the deductions resolution.
• Errors and inconsistent resolution results thereby leading to customer dissatisfaction can be avoided.

Importance of timely and proper response to the customer
One cannot overstress the importance of handling a customers' claim promptly and properly. Unless you provide a unique and needed product or service, customers have alternatives. Your business depends on personal attention to the customer. Many companies, now have customer financials service departments which are primarily credit, and collections departments with the core theme of servicing the customer timely and properly. Some businesses spend too little time handling deductions and disputes and the result is dissatisfied customers who can take their business elsewhere.

It is important to understand that each customer needs to be attended differently. For example, when an established and loyal customer disputes a bill, a business should be careful to evaluate the customer's claim fairly and make every effort to satisfy the customer in some way. It is far cheaper to cultivate established customers than to attract new ones through advertising and promotional efforts. In some cases, deductions are agreed upon even if the customer was wrong in a specific case. It also is important to apply cost/benefit analysis to deductions. In many cases, the time costs of evaluating the customer's claim and the potential for losing the customer goodwill far outweigh the benefit of denying a discount.

Modern deductions management systems enable close interactions for the deductions analysts with sales and customer service organizations to assess the cost/benefit of handling the deduction and arriving at proper resolution that will help maintain good relationships with the customers. By automating work flow processes, deduction analysts can free themselves from the administrative activities involved with distribution and coordination of the deductions with other departments. They can now focus more on quality interacts and assessments with the help of sales and customer service to arrive at proper resolution to the customer.

These systems also can help keep track of where the deduction is in the processes, who is currently handling it, what stage of the resolution process is it in, how many days it has taken for the resolution and other relevant processes related information. This information is very helpful in servicing the customer in a timely manner. Process efficiency and resolution times can be greatly improved. Status information on deductions is very helpful to respond to any inquiries from the customer.


Business Intelligence: The ultimate advantage
The primary weapon for breaking down departmental barriers and addressing core issues behind deductions is good intelligence. Good intelligence can be leveraged to break down departmental barriers and address core issues behind deductions. Deduction resolution software provides a database that can be used to track problems and monitor accounts. Deduction resolution software will record problems causing deductions and inefficiencies in resolution process, allowing for intelligence to be gathered. This intelligence will later be used to guide management in formulating short term and long-term solutions. It serves to identify the internal causes underlying most deductions.

An important aspect in the management of deductions is understanding where you are in the process and how you are doing. As previously mentioned, reports at the end of each month that break out deductions by type (returns, pricing/billing, transportation, advertising, etc.) with an aging by type often are helpful in gauging the severity of a problem. When possible, these reports should be done on a consolidated basis and broken out by sales division to show possible product problems, selling irregularities (untrained sales personnel), or operational problems within a business unit or sales division.

Deductions can be analyzed by type, number, dollar amount and age. Generating reports that include this information is, by itself, a powerful tool for eliminating the root causes of deductions. Being able to quantify the severity of a particular type of deduction goes a long way towards getting the key decision-makers within an organization to take action. Decisions can be made to eradicate the root causes and also enact system changes that lead to process or performance improvement.


Next steps: What does it take
There are tremendous -- and proven -- advantages to ebusiness solutions in a number of areas within the enterprise. Credit and collections departments can embrace e-business solutions for collections and deductions management and achieve very enormously high degrees of efficiencies compared to manual, paper-based processes. Accounts receivables is the core component of working capital. Efficiencies around these processes impact cash flow efficiency of the company. E-business is a culture change for most organizations but it is inevitable for businesses to survive with a competitive edge. It helps business get on the fast track with better controls. The faster you embrace it the better advantage you have compared to your competition. Why wait?

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Veena Gundavelli is president, CEO and cofounder of Emagia Corporation, which builds comprehensive software packages for end-to-end management of the accounts receivables and payables processes.

Emagia provides collaborative e-business software solutions that streamline and automate cash flow processes for medium-to-large enterprises. Through a powerful combination of web-based collaboration technology, electronic invoicing and payment (EIP) technologies and cash flow management tools, Emagia solutions optimize working capital and improve profitability.

Prior to starting Emagia, Gundavelli was a cofounder of Solix Systems, a leading provider of consulting services in the area of enterprise financial applications. Solix was recently named one of Inc Magazine's 500 fastest-growing privately-held companies. Gundavelli, who holds a master's degree in computer engineering from Santa Clara University, previously held several engineering management positions at Cisco Systems and other companies.