5 Deduction Management Best Practices for Your AR Team

In brief:

• U.S. companies face $22 million in deductions each month and approximately 10% of those are invalid – leading to millions in revenue leakage if not properly managed.
• Deduction management best practices are structured strategies and tools used to resolve customer payment disputes efficiently, recover lost revenue, and maintain strong customer relationships and financial health.
• Leveraging automation and AI helps AR teams reduce manual errors, accelerate resolution times, and improve visibility into the status of outstanding deductions.
• Root cause analysis helps identify patterns behind recurring deductions, enabling companies to prevent future revenue leakage and operational inefficiencies.

Customer deductions and disputes are an inevitable part of accounts receivable (AR), occurring when a customer does not pay – and thus disputes – all or part of an invoice. But unauthorized or excessive AR deductions can create significant pain for organizations – negatively impacting operational efficiency, cash flow, and profitability. 

An effective deductions management process is essential for resolving disputes quickly and consistently between your business and customers, ensuring timely collection of payments without straining relationships or harming your company’s bottom line.  

Some AR deductions are straightforward – for instance, customer agreements may allow for volume discounts or other negotiated purchasing power. However, it’s not uncommon for customers to take additional money off, such as claims involving product shortages or damage. 

A structured accounts receivable deductions management process is vital for tracking these claims, validating disputes promptly, ensuring payments are collected or corrected, and effectively communicating with customers.   

Inefficient deductions management increases the risk of revenue leakage – lost revenue that is never recovered.

Lengthy back-and-forth exchanges frustrate customers and increase deduction resolution time as well, impacting working capital that could be invested in other parts of the business.  

Accounts receivable deductions remain one of the most persistent and challenging issues in the AR process today. Let’s examine 5 deduction management best practices that can help recapture revenue leakage before it puts a dent in your profits.

1. Stay on top of customer requirements with a robust deductions management process

Many large customers, such as “big box” retailers, maintain strict policies for dispute management: for example, only allowing suppliers to dispute deductions within 60 days. Staying aligned with these requirements is essential to avoid getting stuck with invalid deductions and unnecessary write-offs.  

An effective deductions management process helps you log and prioritize unresolved disputes to ensure a timely and consistent response, using criteria like dispute age, customer policies, reason codes, dollar value, and relationship importance.    

Consider these best practices:  

• Know your customers’ policies
  Proactively investing time upfront into understanding customer-specific deduction policies helps prevent revenue loss due to missed dispute windows – an essential step in effective deductions management.  
• Design processes for success
  Once you understand customer requirements, tailor your process for managing disputes to reduce revenue leakage. Clearly defined workflows for handling different types of erroneous deductions enable faster resolution by eliminating guesswork for your team.  
• Measure performance
  Tracking key metrics like Days Deductions Outstanding (DDO) offers insight into how effectively open AR deductions are managed. A high DDO indicates an inefficient process that requires tweaking.

2. Leverage technology to resolve accounts receivable deductions faster

U.S. companies face $22 million in deductions each month and approximately 10% of those are invalid – leading to millions in revenue leakage if not properly managed, according to a HighRadius AR deductions management report. 

However, traditional processes for recapturing revenue from AR deductions are labor-intensive and error prone. AR staff often spend valuable time manually retrieving data from multiple systems, chasing documents through emails or phone calls, and piecing together information scattered across departments and external sources.  

Excessive manual processes make standardization nearly impossible, leading to inefficiencies, higher costs, and over-reliance on individual staff knowledge.  

Leveraging technology like automation and AI is essential to optimizing the deductions management process.  

Here are just a few opportunities:

• Speed and standardize the AR process
  Intelligent automation can automate approval workflows and downloading of key documents like Proof of Delivery (POD) and Bill of Lading (BOL).
• Process documents faster
  Intelligent Document Processing can extract, classify, and interpret relevant details from customer claim forms, remittances, and customer emails.
• Automate complex processes
  Agentic AI brings an unprecedented ability to automate processes that are too complex for traditional automation. AR use cases include performing root cause analysis at scale, automatically validating deduction claims and disputing invalid ones, and analyzing customer payment patterns, credit risk, and account history to prioritize collection activities.
• Eliminate repetitive work
  AI-powered automation gives AR staff bandwidth to focus on more important work by eliminating mundane tasks. For instance, it can track customer trends to automatically approve AR deductions that recur with the same amount and reason every month.
• Reap the benefits of electronic payments
  Taking advantage of EDI (electronic data interchange) payment methods is an important optimization strategy, enabling you and your customers to securely send and receive payment-related information directly between your ERP systems. With automatic access to backup data needed for validation, AR can avoid delays stemming from manual processing errors, mailed documents, or locating separate files. 
• Improve customer communication
  Leverage technology to streamline communication, creating collaborative environments where AR staff can chat with customers in real time.

3. Centralize information in an accounts receivable claims repository

Deduction management is not a standalone process, requiring input from sales, logistics, and other departments. 

But siloed operations and ineffective communication extend the resolution cycle, forcing AR teams to waste significant amounts of time tracking down critical information from other departments. Cross-team collaboration typically stands as the biggest internal challenge to resolving deductions effectively.  

Creating an AR deductions claims repository is an important deduction management best practice, delivering full visibility into outstanding disputes across your enterprise. 

Storing all relevant documents in a cloud-based, centralized information hub like Microsoft SharePoint enhances cross-team collaboration, ensuring stakeholders can easily access the information they need to quickly resolve deductions and claims. This process also facilitates production of weekly deduction management reports, driving action plans for urgent issues.  

Maximize efficiency by organizing documents in your deductions management system based on business preferences, such as by reviewer, customer, or claim type. Categorizing AR deductions by reason also helps enterprises identify inefficient operational procedures, enabling corrective measures to prevent recurring issues.   

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Real-time access to cloud-based platforms further drives efficiency by allowing multiple stakeholders to review documents without confusion over versioning. Platforms like SharePoint also offer stringent security practices, such as identity management controls that prevent unauthorized access.

4. Increase internal controls to prevent payment fraud

Implementing strong internal controls in your AR deductions process is key to preventing costly misuse. 

Abusing write-offs is a leading source of AR fraud, where dishonest employees record deductions to a customer account and pocket the funds. Distributing the deductions management process across multiple employees serves as a core internal control, reducing fraud risk by limiting opportunities to commit or conceal misconduct.

Putting more eyes on the process also increases oversight for spotting and correcting errors. This moves organizations toward a process-driven mindset, enabling standardization that reduces reliance on tribal knowledge.

Segregation of duties increases accountability as well. Defining authority and responsibility for each action improves visibility into the deductions management process, while also helping staff build expertise by focusing on specific tasks.

5. Prioritize root cause analysis to solve deduction management challenges

Deduction management is inherently complex, with disputes arising from a wide range of issues. Conducting regular root cause analysis helps uncover trends and underlying challenges that cause recurring issues, such as damaged products triggered by warehouse inefficiencies. 

That way, AR teams can take corrective actions to prevent “self-inflicted” AR deductions and revenue loss.   

Here are key actions to consider:

• Enhance your enterprise resource planning (ERP) system with reason codes
  Clearly indicate why customers take short payments.
• Identify top “offenders”
  Find out who represents the most deductions or biggest dollar amounts.
• Prioritize investment of resources
  Focus on rectifying issues with the biggest impact. 
• Act proactively
  Eliminate preventable deductions by sharing analysis with relevant departments and management.
• Mitigate communication gaps with customers
  Miscommunication is a primary cause of disputes. Automating purchase order changes, for example, helps ensure updates aren’t missed and orders aren’t fulfilled incorrectly.

Why Auxis: Stop Customer Disputes from Putting a Dent in Your Profits

AR disputes are a common occurrence, and the ability to resolve deductions effectively holds the promise of significant payoffs. But most AR organizations lack the time or knowledge to implement best practices for deductions management effectively. 

Partnering with a top-quality accounts receivable outsourcing provider like Auxis delivers the experience and expertise to streamline validation and identify erroneous disputes promptly.   

Recognized as a top Order-to-Cash outsourcing provider by leading research firms like Everest Group and ISG, Auxis combines best AR practices with advanced AI and automation technologies to accelerate access to your hard-earned revenue. Its nearshore delivery model in Latin America helps AR teams beat the severe finance & accounting labor shortage in the U.S., providing instant access to a deep pool of top finance talent in your time zone. 

With Auxis as your AR outsourcing partner, you can feel confident that earned payments are received in full – avoiding impacts on revenue and cash flow while balancing good relationships with your customers.   

Struggling with managing deductions and customer disputes effectively? Schedule a consultation with our AR experts today! Or, visit our resource center for more AR tips, strategies, and success stories.

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