Days Deduction Outstanding (DDO)

What is Days Deduction Outstanding (DDO)?

Days Deduction Outstanding (DDO) is a key metric or performance indicator in deduction management that is used to demonstrate how effective a company is at resolving deductions. It refers to the number of days that account receivables practitioners will need to resolve an outstanding deduction. To calculate DDO, the amount of the open deductions is divided by the average value of deductions incurred within a certain period of time.

With time, customer disputes usually get hard to track, investigate, and solve. It can lead to customer deductions, which can leak a lot of revenue and reduce profits.

For several companies, revenue leakage can reach millions of dollars yearly. It is why DDO is important. It calculates how well or how poorly a company is able to resolve its open deductions. The deduction management team can then put up the necessary measures to improve the situation.

How to Interpret Days Deduction Outstanding

A lower DDO is always desirable since it shows that the deductions management team is effective in resolving open deductions in an ideal time. In contrast, a higher value DDO indicates that the process of deduction resolution is inefficient and needs to be streamlined more.

A higher volume of unresolved deductions is also a sign of gaps in deduction coding, cooperation, research, and resolution. An organization with many unresolved deductions will be unprofitable.

Causes of a Higher DDO

1. Poor internal communication

If the data exchange within internal teams is inadequate, the tracking of deductions becomes difficult. Inadequate documentation of deal sheets makes the situation worse, hence increasing the deductions resolution time.

Some deductions may fail to be validated and remain as open deductions due to a lack of documentation. To avoid such an issue, an organization should create a central document repository to ensure easier retrieval of documents and deal sheets relating to deductions.

2. Invoicing inconsistencies

A customer may short-pay because the amount stated on their copy of the invoice is incorrect. In such cases, the customers should not be victimized by the deductions team. To avoid such issues, the billing and invoicing team should maintain proper internal coordination with the deductions team.

3. Inadequate quality checks

When the logistics and compliance teams fail to conduct adequate quality checks, it may result in a lack of documentation. The lack of documentation, such as freight bills, proof of delivery, and bill of lading, can lead to customers raising claims against damages, shortages, and poor-quality products. As a result, the deductions will stay open.

Any incongruities from the logistics and compliance teams make the resolution of the open deductions very hard for the deductions team. Regular quality checks should be conducted.

Best Practices to Reduce DDO

Below are some of the best practices to reduce DDO significantly:

1. Maintaining a central repository of data

Deduction backup documents, such as a bill of lading, deal sheets, proof of delivery, and shipping documents, should have a single source to make it easier for the deductions team and other teams to find out the information they need. Maintaining a central data repository also helps to facilitate internal collaboration.

2. Using a deduction validity predictor and tracker

Analysts usually take a lot of time to isolate invalid deductions from those that are valid. By using a deduction validity predictor, the deductions can be validated automatically.

3. Adopting an electronic workflow

The visibility of internal communication between the deductions management team and other teams can be improved through a standardized workflow. With an electronic workflow, there is less need for random emails among the internal teams during order management.

4. Automation of reason coding

The deductions team usually spends a lot of time matching internal and customer reason codes. By automating the entire process, the deductions team will be able to get enough time to focus on the analysis of deductions.

5. Auto-correspondence

Auto-correspondence can be done by creating predefined templates for different scenarios of communication emails. It can help to smoothen communication. It also enables analysts to focus on more important tasks, such as deduction analysis and high-value decision-making.

Additional Resources

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class credit analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Accounts Receivable Aging
• Days Inventory Outstanding
• Sales and Collection Cycle
• Source Documents
• See all accounting resources