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Revenue Leakage: A Focus on Deductions

by: Murray Kain | May 29, 2019

Today’s ever-changing revenue ecosystem is increasingly complex, regardless of industry. Various industry experts have concluded that companies’ revenue leakage contributes between 1 to 5 percent reduction in Earnings Before Interest Taxes & Amortization (EBITA). Why should companies continue to miss revenue and reduced margins, while also dismissing the leakage as simply a cost of doing business? Any reduction in revenue in performed processes can and should be prevented or, at minimum, marginalized as much as possible. The full financial supply chain contributes to revenue leakage. An area where a company can quickly see symptoms not only for leakage but for process gaps and inefficiencies is deductions. We’ll focus on deductions occurring from Go-to-Market (GTM) Processes.

Deductions mount quickly, increasing a company’s Accounts Receivable (A/R), reducing available cash-flow and increasing Selling, General & Administrative (SG&A) expenses. Let alone, a company’s internal cost, an indirect external cost, is its reputation with its customers. A snowballing deduction balance can deteriorate customer relationships and the potential loss of future customers and sales.

Deductions can result from:

  • Inaccurate pricing/contracts
  • Delays due to inaccurate payment of rebates, promotional and incentive programs
  • Product or service deficiencies
  • Incorrect billing

Each area is a broad category of deductions, and the resolution of these deductions cross multiple organizational teams. Inaccuracies within agreements and contracts have a direct impact on all downstream revenue processes. Improving agreement accuracy, as it relates to pricing, dramatically reduces pricing deductions, customer confusion and customer time and effort:

  • Ensure correct customer or product/material receive qualifying pricing
  • Identify areas to offer best pricing to customers
  • Reduce efforts to maintain customer pricing

In dealing with complex GTM Programs, if a company does not have an efficient process for the timely payment of incentives, rebates or other promotional programs, customers will deduct what they have factored they are owed. Customer deductions increase the times to apply payments in the cash application process and collect to reduce outstanding line items in A/R. Each department, which spends time on these deductions, adds an additional cost. Should a customer over deduct, the likelihood of collecting the difference is slim. So, not only did the customer over deduct, but multiple departments expended time to address the deduction.

Areas of focus:

  • A streamlined reconciliation Process between documentation submitted vs. actuals
  • Establishing thresholds for tolerance
  • Digital Document Submission
  • Proactive Communication for missing documentation

How do you focus on these areas to not only decrease revenue leakage, but also maximize customer value, increase sales and yield additional profit?

First, an effort to reduce leakage should be a company-wide methodology where everyone can bring forward opportunities for efficiency. Technology is the catalyst to push companies over the finish line in terms of automation, validation and controls.

Many companies are looking for upgraded technology but struggle with creating the business case to justify the capital expenditure. The Vistex Business Advisory is a team of seasoned professionals with vast industry knowledge within the revenue cycle operations. Companies who invest in Vistex realize not only tangible ROI results but also strategic benefits to change their organization for the better.

Vistex provides a full suite of GTM solutions covering all areas for reduced cost, increased efficiency and increased profit. With Vistex solutions, your customers receive the best possible price based on approved agreements, and you’ll have the validations and audits to protect your margins. Additionally, you will have quick access to claim details and validation to reduce payment cycle time and deductions.