Deductions Management – Imperatives to Sustain and Enhance Profits for B2B Customer Segments

Deductions Management is a crucial part of Accounts Receivable Management, which can cost small and mid-market companies millions of dollars in yearly expenses if not managed efficiently. Effectively managing deductions is vital for businesses to maintain a steady cash flow and robust financial health. However, the traditional approach of deductions management is time-consuming and susceptible to errors.???

In recent years, businesses have started adopting advanced technological solutions to enhance the efficiency of deduction management. In this blog, we will unravel the imperatives behind deduction management, delving into its role as a catalyst for elevating profits in B2B, and provide you with actionable strategies to improve deduction management.?

Deduction Management: What is it and Why is it Essential??

When a company receives short payments from its customers against invoices or debit notes, the amount not paid is considered a deduction.?

For example, if a customer has been invoiced for $500 but makes a payment of $300, that customer is said to be taking $200 as a deduction. ??

Deduction management is a process conducted by multiple teams, including finance teams, supply chain teams etc., in an organization that involves:?

• Validating if a deduction is authorized or unauthorized (unidentified)?
• Working with relevant stakeholders to handle unauthorized deductions?
• Communicating with customers to resolve unauthorized deductions?
• Modifying invoices in the ERP??

While deductions are more prevalent in goods-related industries, service-related industries also have several deduction types, which, if not actively tracked and resolved, could lead to significant margin/profit impact. Let us take an example:?

In the above instance, a company with 10% unauthorized deductions implemented B2B finance automation solutions for deductions management. As a result of this implementation, the company successfully reduced unauthorized deductions to 1%, resulting in $5 million in profits.?

Types of Deductions in B2B Payments?

• Trade deductions?

Trade deductions are claimed for various reasons, including promotional or advertising costs, discounts, and markdowns. The seller and customer specifically agree on these based on parameters like volumes, date range, specific merchandising, etc. ? ?

For instance, the customer can claim trade deductions against a specific promotional offer or advertising in a particular aisle in a store or in an e-commerce marketplace.?

• Non-trade deductions?

Non-trade deductions are associated with goods shortages, damaged goods, delayed goods deliveries, price differences, etc.?

• E-commerce/Marketplaces specific deductions?

Deductions specific to the e-commerce/marketplaces include transportation charges, inventory holding, platform fees/commissions, returns processing fees, etc.?

• Post-Audit Deductions?

Post-audit deductions are commonly initiated/identified by internal or third-party auditors working on behalf of customers. These deductions are made based on issues such as trade promotions agreed upon but not taken and invoicing errors that were previously not identified. Post-audit deductions could also include claims for deductions on invoices that have exceeded a 12-month duration.?

What are the Challenges in Deductions Management Process??

An active deductions management process includes the following steps:

Challenges in Each of These Steps:?

• Identifying the deduction:?

If customers don’t share remittance advice, sellers (mostly the collections or sales teams) need to reach out to the customer to understand the reasons for the deduction.???

In the case of customers sharing remittance advice, there are other complexities involved:?

– Customers share remittance advice in various formats: PDF, excel, email body, EDI etc.??

– The definition or nomenclature of these deductions varies from customer to customer and may differ from the seller’s definition. For example, as a seller, Unilever might encounter different nomenclatures of deductions from its customers, such as Amazon, Walmart, and Target, which do not match Unilever’s pre-defined nomenclature of deductions. There is no specific standard that exists.?

• Tagging the deduction:??

Due to the diverse nomenclature of deductions, A/R teams require a lot of manual effort to read, identify and tag deductions according to the accounting/ERP deduction definitions.?

• Resolving the deduction:?

Given the complexities and different teams involved (e.g., supply chain, finance, and accounting teams) across the organization in resolving different deduction types, resolution workflow management has several challenges.??

1. Keeping track of all the deductions and categorizing them by customer, invoice, and payment.??
2. Managing approvals via emails from multiple departments.??

Read the full blog: https://globalpayex.com/resources/deductions-management-imperatives-to-sustain-and-enhance-profits-for-b2b-customer-segments/