Lately we’ve been talking a lot more about the hefty task of managing deductions for many of our CPG and inventory based clients. The seemingly convenient option of selling through a distribution network has one (big) hidden challenge: managing and challenging deductions. The average business owner is not in tune with what they are, and how they can impact their business, let alone actively watching for them and remedying them. This is where an outsourced accounting solution like Accountfully helps the smaller CPG biz stay on top of them. Now is a great time to revisit the subject with some additional best practices, pulled from a conversation with our deductions management program lead.
In short, a deduction is a charge applied automatically by a distributor for pretty basic reasons; from a damaged item, to an assumed discount in which the distributor could be taking the discount outside of the contractual terms. However, these “basic” reasons can seriously add up, especially when a smaller business is relying on that revenue to operate.
Unless you are actively monitoring this area of your business, you can easily miss it. When you do catch it, you can become overwhelmed by trying to remedy unnecessary chargebacks, or be too late to the party, and miss out on a repayment completely. This is why larger businesses typically have their own dedicated departments to work on deductions management for them, full time.
Deductions management is a rapidly growing service Accountfully provides to clients. We help many of our recurring clients as an additional part of their engagement, but we also have hourly/ad hoc clients too. Our deductions management team focuses on helping companies get their documentation and practices honed in, so more of the disputes are repaid as a whole. To see if this is working, our team tracks the amount of disputes won versus lost. Our deductions team lead says the companies that have the proper documentation tracked and ready are the ones seeing the most success.
“For each customer that we are actively doing deductions management work for, I am tracking the amount of disputes we have been able to submit and the amount that has been repaid. For example, [a particular client of ours] is very organized and I am able to get the documents needed for each dispute. Of the disputes that have been reviewed by UNFI/KeHE (we have quite a few that they have not responded to yet), we've won 73% of them!”
Beyond this calculation, we collect as much data as possible for each customer to assess any KPIs. As we enter deductions, we can run analyses and slice and dice the data if that would be beneficial. After all, it is nice to see the savings associated with having the deductions management process in place.
Everyone loves the easy wins for confidence building, so let’s start there. If you are a business owner dabbling in your own deductions, this is a great start. Many of these deductions can be avoided before they leave your warehouse by having your documentation, processes and procedures in check.
Make sure you are checking all of the boxes (pun slightly intended) by having a very detailed bill of lading (BOL) and a laser-focused packing system. You need to know the quantities packed, shipped, and received, and you need proof on paper. A signed BOL on the receiver’s end means they are officially identifying the quantity they have received.
These tend to be the most likely to be invalid and a result of a receiving discrepancy. These are relatively easy to win as long as the customer has a signed, itemized BOL.
Some of the bigger retailers will fine vendors if they don’t meet certain requirements. This can range from shipment quantities to speed of re-stocking.
If the customer is operationally organized, these are also relatively easy to achieve repays on.
The classic retail sales environment wants an allowance of free merchandise per SKU to test or promote a new product. If this amount is not documented clearly, the retailer (and manufacturer) can be double charged, or not be clear on the amount of “freebies” they are allotted.
If the customer has an efficient process in place to track slotting, it is easy to determine if these deductions are valid. If they are not, it is easy to prove that the slotting fees have already been charged or that a product is not new in a deductions claim.
Expanding upon the five keys to deduction management success, and the three easy wins above, are additional items to add to your program.
This is the most important document in the deductions world. It needs to be signed by the receiver, or it will lose its legal power. Not to mention, offer zero proof of how many items arrived, or in what condition.
They should not only be signed by the distributor, but also should be itemized and ideally disclose the lot code information for each product as well.
This is where you can avoid a lot of heartbreak by having your invoicing, communication, and documentation game dialed in. A simple oversight in matching invoice to PO, can spur a (valid) deduction; whether it be for quantity shipped or received-date at stake.
“I've seen several examples of a customer that might have to short ship an order, but then they invoice it in full, leading to a deduction that is valid (and overstates revenue). Along the same lines, I see a lot of late delivery fines that are avoidable if the customer rejects the PO if they determine they can't meet the delivery window.”
It's as simple as asking the buyer to reissue the PO with a different delivery window and that fine can be avoided.
Circling back to better managing your freebies and promos, we see additional charges add up when a distributor charges a fee on top of regularly scanned items. A clear definition of what is allotted to trade spend should be defined clearly, and again - documented. It is also important to address any fees associated with the promo products in your budget, to minimize any surprises.
Clearly identify and define your promotions to distributors, and include potential fees in freebie budgeting to better manage trade deductions and avoid additional scanning fees.
For the most part, big distributors like KeHE and UNFI are operating about the same as they have for the past few years, but there is one more recent change to be concerned about; they are cracking down on their documentation policies. Their newer Accounts Payable reps are not letting anything slide. Our resident deductions management expert, Devyn says, “in the past, they would accept delivery receipts as proof of when an order was delivered, and they no longer are. They have had quite a bit of turnover in their A/P reps in the last year and it seems like the new reps are being trained "by the book".
Pro Tip: this is where you, as a customer, can address potential deductions before they start by having your own documentation policies ramped up. Educate yourself on distributor policies and terms, and document everything.
This is a big task to take on, but you don’t have to do it all by yourself. You can immediately set your business up for success by ensuring your documentation practices are top notch. Do things by the book, save, and efficiently store everything involved with your products sold through distribution channels. The next phase is to engage an outsourced solution to assist you in the deductions management process. Our pro team can help you battle the chargebacks with their many years of experience at the ready.