Deduction management definition
/What is Deduction Management?
Deduction management is the process used to verify payment deductions made by customers. Deductions can represent a significant loss in some businesses, so deduction management is a critical part of their operations. Deduction management systems are typically targeted at verifying deductions as quickly as possible, so that the collections staff can follow up with customers in regard to invalid short pays. In the following sections, we note a variety of best practices for how to manage deductions in the most optimal manner.
Route Deductions to Subject Matter Experts
Customers may take a number of different deductions from their payments, such as for damaged goods, marketing allowances, and volume discounts. Typically, these deductions are consolidated by customer and assigned to a single collections person. However, it can be difficult for one person to understand the details of a number of different kinds of deductions. An alternative is to route different types of deductions to subject matter experts (SMEs), each having deep experience with a specific type of deduction.
Code Deductions by Type
The use of a dedicated SME system requires that all customer deductions be coded by type when the related invoices arrive. A workflow management system is then used to route the deductions to the deduction SMEs. The workflow management system is also useful for monitoring the time required to resolve each deduction, which can be used to track efficiency levels and adjust work systems.
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Identity Repeat Offenders
Aggregate deductions by customer, to determine which ones are taking the most deductions. This analysis can be rolled into a review of profitability levels by customer. The result may be a decision to drop those customers who are abusing the company with excessive deductions, or at least tighter monitoring of them, with ongoing feedback to them regarding what is and is not acceptable.
Focus Resources on the Largest Deductions
Aggregate deductions by type, to find out which ones are causing you the most losses, and then focus your resources on minimizing those deductions. For example, if customers are taking early payment discounts without actually paying early, then concentrate your efforts on contacting these customers about the issue, and consider taking away their early payment discount option entirely.
Provide Feedback to Departments Causing Deductions
A common issue is for deductions to be caused by problems arising in other departments, such as quality issues that arise in the production department. When this happens, provide feedback to these departments, describing the deductions taken and the specific complaints being raised by customers. This likely requires ongoing follow-up, to see if the other departments are fixing the indicated issues.
Deduction Management Software
Deduction management software is a tool designed to help businesses streamline and manage the process of handling customer deductions. Effective deduction management is critical for maintaining cash flow, improving customer relationships, and ensuring operational efficiency. The key features of this software are as follows:
Automated deduction matching. Automatically matches deductions with the corresponding invoices, contracts, or promotional agreements to determine validity.
Centralized data storage. Provides a centralized platform to store and access all deduction-related information, including invoices, credit memos, and proof of delivery.
Root cause analysis. Identifies trends and recurring issues that lead to deductions, enabling businesses to address root causes and minimize future occurrences.
Workflow automation. Automates the workflow for resolving deductions, including approvals, escalations, and communication with relevant stakeholders.
Reporting and analytics. Offers dashboards and analytics to monitor deduction trends, recovery rates, and financial impacts.
Integration capabilities. Integrates seamlessly with Enterprise Resource Planning (ERP) systems, Customer Relationship Management (CRM) systems, and other financial software for a holistic view of accounts.
AI and machine learning. Uses AI to predict potential deductions, identify patterns, and suggest the best resolution strategies.