Getting your product into stores and in front of customers is the outward focus of every CPG brand, but it’s not the entirety of the business. There’s a lot of things that need to happen behind the scenes for your business to be successful, such as hiring a customer service team, establishing an accounts receivable department, and creating processes to deal with all the bumps along your road to success.If you don’t have the right type of workflow established, then deduction management might be one of those bumps. It can be tough to keep track of all the deductions that come through and whether or not your team has approved them. Without a system in place, you could start seeing it affect your bottom line.
In this article, we’ll take a deep dive into the deduction management process. We’ll teach you why managing deductions are crucial to your business, how an effective process works, common problems businesses face, and how to steer clear of major snags.
Why It’s Important to Manage Deductions
Deductions are a normal part of business, but that doesn’t mean they don’t take some effort to properly manage. Food product brands are more likely to deal with deductions than other industries, which means plenty of chargebacks or short pays could come through your accounts pipeline every day. If there’s no process in place for evaluating and resolving deductions individually, then they could start causing disruptions to your cash flow and overall operating profits.
There are three main types of deductions for any business:
- Intentional deductions are sales-related and include deductions taken for things like advertising, promotions, allowances, and markdowns. These deductions are considered the cost of doing business and are almost always legitimate, so opportunities for recovering your money are unlikely.
- Preventable deductions are usually associated with compliance issues, such as supply chain problems like shortages or late pickups or deliveries, or products shipped short-coded. These deductions are easy to stop, and a quick self-audit can help you pinpoint the area in your operation that’s breaking down. Depending on the circumstances, there are typically opportunities to recover some costs from these deductions and prevent future claims by adjusting your process.
- Unauthorized deductions are typically customer deductions. They can occur when customers pay outside of their original invoice terms, there are errors on inbound goods, or there are chargebacks outside the scope of the distribution agreement. You should aim to recover 100% of these deductions.
As you can see, there are numerous ways that deductions, whether “authorized” or “unauthorized,” can impact your business. And when it costs businesses an average of $97 to resolve a single deduction, you want to make sure you aren’t leaving room for too many to come through your pipeline.
Understanding an Effective Deduction Management Process
You can use data from your current deduction management process to help you find where you need to improve. It can show you which part of your system is causing confusion. Maybe your accounts receivable documentation is missing important information or there are compliance issues you weren’t aware of.
No matter what issues you find, to have an effective deduction management process, you’ll need your teams to be cross-functional. When everyone is working together toward the same goal, it becomes much easier to resolve deductions without losing money unnecessarily.
Customers might short pay or request deductions for a number of reasons, including:
- Damaged goods
- Billing errors
- Shortage in shipments
- Promotions
- Allowances outlined in the contract (i.e. spoils, marketing, payment terms, etc.)
Everyone on your team should understand your policies regarding deductions for these reasons. It ensures your team is working as a unit and that problems are resolved correctly every time, regardless of who was handling them.
To streamline your resolution process, you’ll need to utilize both your sales and accounting teams in a series of steps to ensure the deduction amount for any of these reasons is warranted. An effective management process might look something like this:
- Both sales and accounting review and understand all your current contracts.
- The sales team maintains a promotional calendar.
- The accounting department gathers all relevant data needed to evaluate a claimed deduction.
- The accounting department will resolve deductions as either legitimate or disputable.
- For dispute resolution, the accounting department should either submit the claim for customer payment or approve the deduction.
- The accounting department should adjust its internal systems and processes as needed to reflect its actions. If you’re using deduction management software, for example, adding reason codes to final decisions or requests for payment can help to keep the rest of the team in the know if they need to work with the customer outside of accounting.
Common Problems with Deductions
Lack of team training
Because deduction management is a team effort, you want to make sure everyone involved is trained in the entire process. This helps ensure clarity and efficiency across the board. Every team member should understand our company’s individual deduction management process and their roles and responsibilities to ensure accuracy.
Not having proper documentation
Certain promotions like discounts and allowances, free-fills, and placement terms can be tricky to keep track of and without backup documentation, reconciling and recovering these deductions might be difficult. That’s why it’s crucial to keep proper documentation of all approved or denied deductions in your system. Accurate records provide solid evidence when it comes to disputing deductions with customers.
An incomplete understanding of all active distribution agreements
It can be frustrating to see customers adding write-offs to their invoices each month, but that doesn’t mean they’re not allowable. Cash applications, pricing changes, and plenty of other things can change the total costs based on your agreement. There will be deductions you don’t like, but you must accept these as part of your agreement terms and a cost of doing business.
No solid process
A reliable process starts with pick and ship and follows through all the way to invoicing the customer. Proper processes help to streamline potential deduction disputes and give your team steps to follow to resolve issues quickly.
Despite what many may think, automation is not always a solution to forming a solid process. It can help to free up your staff to handle more pressing issues, but a computer has to work based on stringent rules. Automation can sometimes result in easily recoverable deductions being approved and remitted to the customer without any further analysis.
Lack of accountability for the sales team
Your sales team should be at the helm of your customer relations. They’re on the ground with your clients every day, which comes with a certain level of responsibility. Sales staff need to be accountable for tracking and communicating all promotions and deals made with customers so the resulting deductions can be quickly evaluated and approved. When the sales team is consistently communicating their actions, the accounting team can handle deductions more efficiently.
How to Stay Ahead of the Curve
CPG brands have a lot to contend with when it comes to deduction management. The best way to stay ahead of the curve and avoid major problems is to have a knowledgeable and experienced internal team with clearly defined processes or a contract with a service provider who has the right industry experience, knowledge, and key contacts to effectively support your deduction needs.
You can use your tools to implement a mature deductions process, which keeps your team synced up and working together. Focus this process on effective evaluation and prevention of deduction claims by emphasizing communication in real-time and adherence to established procedures. You can leverage automation where possible to reduce the manual workload, but keep in mind that final decisions should be made by your team.
How VDriven Can Help
VDriven specializes in helping CPG brands succeed, which includes optimizing your deduction management process.
We can evaluate your current deduction activity, determine the scope of your service requirements, and even review all of your deductions against your distributor terms and distribution agreements. We also help resolve disputed deductions and recover the hard-earned profits due to you.
Our clients receive a weekly dashboard that shows the status of all their deduction denials and recoveries so they can track their progress and focus on the most pressing issues. As part of our service, we conduct monthly alignment reviews to make sure our clients are staying on track and they have the opportunity to ask us questions or request additional help.
At VDriven, we love helping CPG brands manage every aspect of their business. Contact us today to see how we can help you improve your deduction management process.
Vdriven
VDriven is a CPG partner for modern brands that improve our daily lives. We fuel your growth and innovation by giving you strategies and support in every phase of the retail process.
