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.
Similarly, automating workflows across departments can help drive cross-functional collaboration, speed resolution of deduction-related issues and make it more difficult for errors and exceptions to take root because much of their ability to occur is essentially automated out. Also automated out are rote, low-level tasks, freeing employees to focus on higher-value work. As many companies have discovered, there's no easier way to double or triple the account coverage and enhance the productivity of collections personnel.
Actionable Insights = Deduction Protection
With integrated views and automated workflows in place, reporting and analytic technologies can provide insights as to why and where in the process errors are occurring. While it is desirable to nip unwanted deductions in the bud, it is even more desirable to eradicate their root causes from the system. In-depth, drill-down analytics can be used to uncover such causes as late delivery, concealed shortages or new sales personnel unschooled in pricing or discounting, and the resulting revelations can be used to further bulletproof the process going forward, so you're not battling over the same ground again and again.
Companies that have implemented this proactive, full-cycle approach — visibility, automated workflows and analytics — to preventing unnecessary deductions have not only experienced sudden improvements in cash flow, operating expenses and customer satisfaction, but have also seen these improvements increase over time. They've gone from perpetually fighting fires to experiencing constant advances in operational efficiency and productivity. And they've enhanced their ability to comply with corporate governance mandates such as Sarbanes-Oxley. Most of all, they're able to view deductions as legitimate competitive weapons, and not as profit-draining liabilities.
About the Author: Robert Sherman is division president, Vengroff, Williams & Associates, a firm with 40 years experience in receivable management solutions, applying proprietary systems and best-practices workflow. www.vwainc.com.