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What is Deductions Management & How Can You Improve It with AI-driven automation?

Betsy Francoeur

As the process for identifying, tracking and resolving financial discrepancies in customer payments, deductions management is a vital component of accounts receivable. After all, what business doesn’t want to make sure they’re getting paid the full amount they’re due?

Yet many organizations treat deductions as an afterthought, handling them using practically archaic techniques, accepting limited visibility and analytics as the norm, and even *gasp* writing off deductions unnecessarily to clear them.

When deductions management gets the attention and investment it deserves, it can have an impressive impact on cashflow and the bottom line — not to mention the entire process becomes less cumbersome and time consuming for all involved. So let’s explore why deductions management is worth improving, the drawbacks of traditional deductions processes and how AI-powered automation turns deductions management into a profitability powerhouse.

What is deductions management?

Deductions management is a process within the accounts receivable function that handles situations when the customer chooses not to pay the full amount of the invoice or makes a claim requesting a deduction on the amount they owe.

When an invoice is not fully paid (a.k.a. short paid) or a customer submits a claim requesting a deduction from their invoice total, it’s the accounts receivable team’s time to shine. In a nutshell, their role in the deductions management process is to validate invoice disputes, modify invoices if the dispute is valid, attempt to collect the remaining payment if the dispute is invalid and keep in close contact with the customer.

The main goals of Deductions Management are:

  • Resolving invoice disputes promptly
  • Protecting the customer relationship
  • Reducing impact on company revenue
  • Reducing days deductions outstanding (DDO)

It may not be as flashy as sales, but deductions management is super important to corporate profitability. 

How deductions management impacts your bottom line

Deductions account for up to 2% of sales.1 Preventable or incorrect deductions result in an average 3.7% margin loss.2 And considering that up to 20% of retailer deductions are disputable,3 if you’re not managing deductions correctly, your company will actively lose money to invalid claims every month. All in all, that’s a lot of cashflow your company isn’t realizing.

Right in the center of all this action are the unsung heroes who handle deduction claims day in and day out: deductions analysts. Deductions analysts must walk a fine line between ensuring the company gets paid in a timely manner and not upsetting and losing their customers. It’s a challenging role to play, made even more challenging by the messy, manual processes most companies use for their deductions management.

The steps in a traditional deductions management process

Manual deductions management can become extremely complicated for businesses that process a large volume of claims. Each step in the deductions management process adds labor cost to the business, which needs to provide an AR team member who can thoroughly investigate each claim to prevent fraud.

Stage 1: Claim submission

There are two main ways a deductions claim can be submitted.

One way is that a customer may decide to dispute the invoice amount before paying. They could submit a claim via electronic data interchange (EDI), a post on your company payment portal, email, phone, fax or even snail mail. That means someone needs to be monitoring these various channels and direct these claims to the appropriate people when they arrive.

The other way is that a customer may choose to short pay the invoice by the amount they believe should be deducted. If they don’t provide any sort of documentation on the reasoning behind the short pay, the deductions analyst has to chase down the customer to find out why they underpaid their invoice and note that somewhere.

Which begs the question: where are deductions analysts keeping their notes on the status and progress of each claim? In a spreadsheet or Word doc? In an email folder? On a piece of paper? With no centralized information repository, it could be any or all of the above.

Stage 2: Claim reception

Once the claim arrives, it must be assigned to a deductions analyst for resolution. That analyst must prioritize the criticality of the claim. Does the dollar amount or customer relationship mean it needs to be bumped to the top of the list? For an analyst juggling hundreds of claims (with more coming in all the time), that can be difficult to do on a simple spreadsheet.

Stage 3: Claim verification

In this stage, the assigned deductions analyst has to put on their detective hat and determine if the claim is valid or invalid. To do that, they need a LOT of information that’s often scattered across many different people, departments and programs. Where’s the invoice, proof of delivery, bill of lading, etc.? Is there incorrect pricing on the invoice? Is there a special promotion or contract conditions in play?

Having to track down all of this data is massively time consuming and oftentimes frustrating for the deductions analyst. What if they don’t have access to the system containing the documents they need? What if a key document is missing? What if the only salesperson who can answer a question is out on vacation? It results in a lot of back-and-forth and “hurry up and wait” situations that delay the claim resolution.

Don’t forget — at any point in this process, the customer may call requesting a status update on their claim. Without a central hub for all deductions activity, it can be difficult to tell at-a-glance when (or even if) a claim was received, where it is in the claims process within your company and if there are any issues preventing its resolution. Instead, staff ends up asking around their team to find out what’s going on with a specific claim before they can respond to the customer.

Stage 4: Claim review & approval

Once the deductions analyst has finally gathered all the necessary documentation and researched the claim, they make a finding on whether the claim is valid (and should be honored) or invalid (and should be contested).

From there, it usually needs to be reviewed and approved by someone higher up the food chain. But who is the correct approver? What if the email approval request gets lost in their inbox or accidentally deleted? What if they’re unreachable? Even something as seemingly simple as getting a claim approved can be fraught with difficulty in a manual environment.

Stage 5: ERP integration & archiving

Last, but certainly not least, the final result of the claim must be noted in the ERP system and the residual debt cleared — whether the claim was valid and a new invoice or credit was issued OR the claim was invalid and the additional money was collected or written off. That means the deductions analyst has to log into the ERP and plug in all the necessary information. They may also have to print off and file any pertinent documents for archiving.

But wait, there’s more! Deductions analysts also need to provide reporting to the higher-ups on the status and outcomes of the deductions they handle. Like the rest of the process, this is done manually — usually in a spreadsheet. It’s another time-consuming task that means digging back through notes and emails to find the necessary data. And in the end, it can be difficult for managers to visualize what the spreadsheets are telling them.

Drawbacks of manual deductions management

The traditional way of handling deductions quickly becomes a quagmire of confusion that results in:

  • Time-consuming investigations: researching and resolving a claim can take weeks and is amplified for high-value, high-volume customers
  • Lack of visibility and traceability
  • Incorrect accounting: financial performance benchmarks such as revenue and cashflow projections are often negatively affected
  • Profit dilution: accumulated write-offs eat into profit margins

It can cost a company $200-$300 to research and resolve each deduction.4 At the end of the day, manually processing claims can end up costing more than they’ll yield in revenue.

That’s pretty depressing, isn’t it? But the good news is, you can transform deductions management into a lean, mean, profit-boosting machine. You just need the right tool.

How AI-driven automation is revolutionizing deductions management

An automated deductions management solution standardizes your process and serves as a centralized digital platform for all the work related to researching claims, routing information, getting approvals, and collaborating with stakeholders and customers.

You just saw what a mess manual deductions management is. Now experience what it’s like using the power of an automation solution like Esker Deductions Management that’s packed with AI capabilities like machine and deep learning, data recognition, and robotic process automation (RPA).

Stage 1: Receive the claim

All customer claims, regardless of format, come in via the automated system. Esker’s Synergy AI captures the data from each claim and matches it with supporting documents (customer ID, invoice, delivery confirmation, etc.). Then the system sorts and prioritizes the claims into queues that are visible on an easy-to-use dashboard.

The dashboard is like a home screen where each deductions analyst or team lead can see claim status (such as how many new claims are in the queue and how many are waiting on approval) and analytics (for example, which claim submission formats are most popular and which analysts are resolving the most claims).

Stage 2: Analyze & approve the claim

Because Esker’s automated platform has already done the grunt work of tracking down all the necessary information regarding the claim and suggesting a course of action, the deductions analyst just needs to validate that everything is correct and make the call on whether to accept or deny the claim.

If the analyst needs to communicate with the customer or an internal stakeholder, they can do so from within the platform, ensuring that any conversations are attached to the relevant claim. Once a claim is ready for approval, an automatic, customizable approval workflow directs the claim to the appropriate people for review and approval.

In fact, some claims can be resolved touchlessly, meaning if they meet certain criteria they can be automatically resolved. That frees up your analysts to focus on more complex claims that need a human touch.

Stage 3: Update the ERP & archive the claim

Automated platforms like Esker can fully integrate with your ERP system, so once a claim is resolved, it’s automatically updated in the ERP and archived. No need to log in to the ERP and manually key everything in.

That’s it — you’re done! How much easier is that?

Why automation just makes sense for deductions management

Automating customer deductions reduces the time, complexity and cost of researching and resolving claims by:

  • Centralizing claims information to facilitate the entire deductions process from start to finish
  • Expediting cross-department collaboration by shortening inquiry pathways from multiple email exchanges to a single, streamlined and trackable process
  • Enhancing visibility and traceability that empowers you to improve your process and make better cashflow predictions
  • Limiting incorrect deductions by more accurately identifying potentially invalid or fraudulent claims
  • Improving customer experience by speeding up claim resolution and communicating with the customer using their preferred method

Organizations that have embraced automation are seeing incredible results. Companies with best-in-class deductions management technology:5

  • Reduce the time to resolve deductions by an average of 15 days
  • Reduce the cost to manage non-trade deductions by 43%
  • Require 41% fewer full-time equivalents (FTEs) to manage deductions

Plus, with Esker’s Order-to-Cash and Source-to-Pay platforms, you can automate not only your deductions management, but your entire accounts payable and accounts receivable functions.

So if you’re ready to break free from the shackles of old-fashioned deductions management, we’re here to help. This 3-minute video pulls back the curtain to show you how Esker’s AI-driven automation Claims and Deductions solution actually works. And you might also like our ebook Solving the Deduction Claims Puzzle.

Sources
1 The Hackett Group, The Hackett Group Finance Benchmark, 2020
2 Automating the Management of Customer Deductions, IOFM, 2018
3 Deductions Management Trends Report, Inmar Intelligence, 2022
4 Automating the Management of Customer Deductions; IOFM, 2018
5 The Hackett Group, The Hackett Group Finance Benchmark, 2020

Author Bio

Betsy Francoeur

As a Copywriter at Esker, Betsy loves writing about the source-to-pay and order-to-cash cycles and creating valuable content for financial professionals. She also enjoys running 5ks, kayaking, traveling with her husband and snuggling her dog.

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