Deductions Prevention Comes Of Age

Deductions is an area where an ounce of prevention is truly worth a pound of cure. Here's how to head off unnecessary deductions before they impact your bottom line


Deductions, or charge backs, can be a normal part of doing business. Rebates, co-op advertising, mark-down allowances — these are part-and-parcel of selling into a competitive environment. But too often, deductions are a way of leaving money on the table. Pricing and product configuration errors, over- or under-shipments, unearned promotional discounts, unauthorized free or expedited shipping — these are all examples of unnecessary deductions that erode margins and a company's ability to be competitive.

Eliminating unnecessary deductions — both the preventable and unauthorized varieties — can have numerous positive effects on a company. The most obvious direct impact is on the balance sheet. In many businesses, deductions can equal as much as 5 percent of outstanding accounts receivable open items, 4 percent of total accounts receivable dollars outstanding and 3 percent of sales. For companies with a 5 percent margin, that means that a $1 million decrease in deductions has the same effect as a $20 million increase in sales.

Less obvious, but also significant, are the indirect effects. These include lower operating costs and productivity increases when employees are freed from trying to identify, resolve and reclaim deduction after deduction. There are also customer relationship advantages to be reaped when customers are taken out of the resolution cycle. No one likes to hear after the fact that their discount was unearned or that they have to pay for that expedited delivery after all. Nor do they appreciate having to spin their wheels helping to get to the bottom of what is essentially your problem.

Getting it Right the First Time

The key to realizing the above benefits is to prevent unnecessary deductions from occurring in the first place so you don't have to dispute, resolve and hopefully reclaim. The invoice creation process has become increasingly complex, with room for errors and exceptions at every step. Deductions prevention revolves around identifying process errors and exceptions as — or even before — they occur so the invoice more accurately fits customer expectations. Effective prevention also involves learning from mistakes and feeding that knowledge back into the business process in order to minimize the potential for future unauthorized deductions.

Until recently, it has been almost impossible for companies to take a proactive approach to deductions. Prevention requires more than just vigilance. Unaided, human vigilance is seldom a match for process complexity and high transaction volumes, particularly when business processes cut across organizational and information system boundaries. Rather, prevention requires an innovative combination of best practices and new technologies for process visibility, automated workflows, and reporting and analysis.

Achieving Real-time Visibility

It's impossible to prevent problems when you don't know they're happening. Hence it is essential to have real-time visibility into the order/fulfillment/invoicing/payment process — a process that typically spans multiple departments and systems.

Disparate enterprise resource planning (ERP) systems hamper access to key information, and even consolidated ERP systems face differing account hierarchies across geographies and business units. To get comprehensive, consistent views of what's happening globally in real-time, it's necessary to implement focused applications that pool all information pertinent to orders, fulfillment and invoicing from all systems. The resulting comprehensive integrated views can be leveraged by Sales, Customer Service, Finance and Collections to quickly and effectively resolve issues. At the same time, information dashboards and other visualization tools can be used to monitor for errors and exceptions and to indicate which deductions are legitimate, and which are not.

Automating Workflows

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