Deductions management is a critical function of CPGs. Cash recovery, retailer relationships, even insights into opportunities for process improvement, depend on this work by AR teams.
Unfortunately, deductions management can also be time-consuming and overwhelming — making it difficult to get ahead. But optimizing processes and leveraging deductions information for growth isn’t rocket science — it can be done by measuring these three metrics:
METRIC #1: DEDUCTION DAYS OUTSTANDING
Deduction days outstanding measures the overall health of a company's ability to manage deductions. It refers to the time it takes to resolve unresolved deductions, and is calculated as:
# of unresolved deductions / (average value of deductions x periods)
The higher the DDO (the longer deductions remain open), the more difficult it is to recover unresolved deductions due to set dispute deadlines by retailers or distributors. Unresolved deductions can eat away at profit margins and, in some cases, erode profits entirely.
Reducing DDO should be a primary goal of every AR leader. The best way to reduce DDO is by adapting a central repository of deduction data to assist with timely validation and automating repetitive tasks, and by practicing a collaborative internal mindset around deductions management.
METRIC #2: PERCENT OF TIME SPENT VALIDATING DEDUCTIONS VS. RECORDING DEDUCTIONS
Some AR analysts spend 40-70 percent of their time extracting deduction data from various sources, such as vendor portals, email, or paper, and recording the transaction in ERP.
What if we told you none of that time and effort was necessary? Automated deductions management solutions automatically locate and extract deduction data — freeing AR analysts for higher-value work such as validating and analyzing deductions.
By reallocating time to focus on validation and analysis, AR teams can improve discovery and recovery rates of invalid deductions — allowing brands to reduce future deductions and ultimately improve profit margins.
METRIC #3: NON-TRADE DEDUCTIONS AS A PERCENT OF SALES
Though trade promotion deductions tend to be the highest dollar value of deductions, non-trade deductions — returns, shortages, freight-related, and compliance-related deductions — are usually the highest volume. And many are preventable.
Analyzing non-trade deductions, discovering improvement opportunities, and resolving root causes for these deductions will significantly reduce deductions experienced, increase profit margins, and improve internal operations.
AR Leaders should strive for non-trade deductions to be less than 0.5% of sales.
THE TICKET TO BETTER MEASUREMENT, IMPROVED PROCESS, INCREASED RECOVERY, AND MORE
Investing in the right automated deductions management solution not only delivers the essential metrics discussed above, but provides the tools to improve processes, increase recovery rates, and more.
DeductionsLink™ puts automation and analytics to work in an easy-to-use SaaS platform. For more information on how to improve your deductions management process, visit our website or contact us at solutions@inmar.com.