The challenge with deductions is that at least 95% of them are valid/non-recoverable. Yet the volume and potential work required to research them all to identify the few invalid/recoverable ones can be huge. How can you protect your profit margins while optimizing the investment of your time and effort?
The short answer is by utilizing automation and a proactive approach to deduction management.
There are two types of deductions: Planned, and Unplanned. Unplanned deductions are the ones that significantly impact profit margins and bottom-lines, and this is where we need to apply more strategic thinking. There can be a decrease of 2-3% of gross margin if deductions are not controlled. In addition, the equivalent of multiple FTEs (and their cost) can be expended on this potentially low value activity.
If deductions are not cleared from the AR Ledger on a timely basis, an overstatement of revenue and the Accounts Receivable can result. Correction of such overstatements usually is achieved with a substantial, painful write-off with its negative impact on profit.
For most companies, deduction processing means high volumes, low proportional and absolute yields, high cost, and pre-empting time from Sales, Customer Service, and Credit & Collections, which can be used in much more profitable pursuits. Hence the need of the hour is a solution that includes a best practice process, automation, policy, metrics and educating the customers.
A Best Practice Process should focus on the high value, higher-probability-of-recovery deductions and drastically minimize effort devoted to deductions with a low probability of recovery or a low absolute value.
Automation with AI-powered Digital Assistants can enable businesses adapt digital deductions that:
- Automate 70% or more of the manual work involved in researching and resolving deductions
- Provide the necessary metrics to manage the resolution process
- Provide analysis into their nature, root causes, etc., to drive internal efforts to reduce self-inflicted deductions (e.g. compliance deductions)
In addition, having a Smart Policy in place can reduce the volume of deductions incurred. For example, by negotiating a “damages & shortages” price discount, all of that type of deduction can be eliminated.
If deductions are processed efficiently, the payback in margin productivity and customer satisfaction can be a multiple of the cost incurred. Proactive management of deductions can change customer behavior leading to a reduction in the volume of deductions incurred.