Days Deduction Outstanding: Your Guide to Reducing High DDO
Days deduction outstanding (DDO) is one of the most important metrics in accounts receivable calculations. It measures how long your team takes to resolve outstanding deductions — which, in turn, reveals critical information about your payment processes, debt management approach and deductions team overall.
Once you know the DDO formula and how to use it, you can leverage this calculation to make measurable improvements. For example, if your DDO is high, you can determine possible explanations and next steps to reduce it.
Here’s everything you need to know about DDO, from understanding the formula to strengthening your cash flow.
What Is Days Deduction Outstanding?
DDO is one of nine key accounts receivable metrics. It’s a look into the complicated and often-tangled world of customer deductions, which can represent numerous problems for your organization. DDO helps you understand the effectiveness of your deductions management process and may be one of the first indicators that you’re losing revenue.
However, DDO represents only one part of the much larger AR story. Here are a few other metrics and how they compare:
Days Sales Outstanding (DSO)
DSO is a measurement of your efficiency in invoice collection management, telling you how long it takes to collect a payment from the date the invoice was issued. A low DSO indicates that you’re fast-moving and effective, while a high outcome might point to issues with your credit management and debt collection practices. You can also measure the best possible DSO, or BPDSO, to determine the shortest potential turnaround time.
Key differences: Keep in mind that DSO measures payments while DDO looks at deductions. While these calculations can be useful together, they aren’t interchangeable.
Average Days Delinquent (ADD)
ADD focuses specifically on overdue payments and the average time it takes to close them out. It’s calculated by taking your DSO and subtracting your actual/average terms.
Key differences: Like DSO, ADD is about payments instead of deduction recovery. Even overdue payments are separate from deductions, so ADD and DDO measure different parts of your AR workflow.
Accounts Receivable Turnover Ratio (ART)
By calculating how often your accounts receivable turnover, this metric helps you understand whether you can quickly turn AR into cash. A high ratio indicates efficiency, while a low one is a sign that your credit and collection procedures may need work.
Key differences: In many ways, ART is a broader view of your accounts receivable environment than DDO. That means it’s less detailed and specific but more valuable for generalized visibility.
Collection Effectiveness Index (CEI)
Not to be confused with ART, CEI measures your effectiveness at collecting all outstanding money over a certain period.
Key differences: CEI is broader than DDO and provides more information about other elements of your cash flow. For this reason, the two metrics may be used to contextualize each other.
Days Deduction Outstanding: Formula Breakdown
To use the DDO formula, you’ll need the following information:
- Average daily deductions: Add the average deduction amounts received during a set period.
- Average value of deductions per day: Take the average daily deductions and divide by the number of days in the chosen period.
Here’s what the formula looks like:
DDO = Average daily deductions ÷ Average value of deductions per day
If you had $250,000 in average daily deductions at the end of 30 days and received an average of $10,000 per day, the formula would look like this:
$250,000 ÷ $10,000 = 25 DDO
Notice that this calculation is based on dollar amounts (though the outcome is still measured in days). However, you can also complete this formula using the number of deductions. This is helpful because the former method can look deceptively optimistic, often because of the prioritization of large-dollar items.
To use the number-of-deductions method, try this formula:
DDO = Total deductions at the end of a period ÷ Average number of deductions per day
Say you had 500 deductions at the end of 30 days and the average number of deductions per day was 10. The formula would be:
500 ÷ 10 = 50 DDO
Once you’ve performed these calculations, you’ll need to consider whether the result is low or high. Here are some considerations to keep in mind:
High DDO
A high DDO indicates that your teams take a long time to close each outstanding balance. It’s easy for customer deductions to get out of hand occasionally — but when this is reflected in your DDO, you may have problems with:
- Deduction errors.
- Poor product quality.
- Over-reliance on manual processes.
Low DDO
If your DDO is low, it means your deductions team is efficient, your company manages customer debt effectively and — perhaps most importantly — your cash flow and revenue are likely doing well. Contributing factors may include:
- Effective internal processes.
- Streamlined communication.
- Deduction automation.
Challenges in Days Deduction Outstanding Calculations
Even when you have the DDO formula in front of you, there are still opportunities for error and confusion. Here are some of the most common challenges in calculating days deduction outstanding:
- Flawed data capture: Even if you have a simple automated system taking data from your workflows, the reality is that one small issue can be difficult to catch — until, of course, it has significantly impacted your DDO or other AR metrics. It’s important to know where your data comes from, how it’s captured and where to check for mistakes.
- Manual data access: Downloading or otherwise accessing data manually can lead to incorrect or incomplete information. This, in turn, makes your DDO calculation misleading.
- Outcome confusion: You must be consistent when using the DDO formula. If you calculate part of it using the number of deductions and another part using the number of days, you’ll end up with an inaccurate outcome.
- Incorrect formula: Remember that DDO is just one of many AR metrics. To make decisions based on payments, number of disputes, high-risk accounts and more, you may need to look beyond deductions and use a different formula.
In some cases, these challenges may be to blame for your high DDO. In other situations, however, high DDO is a sign of deeper issues.
How to Fix a High Days Deduction Outstanding
There are different ways to improve your DDO depending on where your deductions team (or company overall) is struggling. Here are a few suggestions to get you started:
Keep Up With AR Trends
Staying up to date on AR trends makes it easier to catch, qualify and rectify deductions. If you don’t keep up with these evolving processes, you might be unnecessarily adding days to your DDO by maintaining an outdated approach. Consistently upgrade your tech, workflows and methodology, however, and you can benefit from best practices before the rest of the industry catches up.
Automate Data Extraction
Human expertise is still a critical part of any AR workflow — but that doesn’t mean your teams need to waste their time and talent on manual data extraction. Instead, streamline these tasks with solutions like robotic process automation (RPA), which can autonomously access customer portals and download hundreds of PDFs in seconds.
Make Information Accessible
It’s not enough to find relevant data; you also need to ensure that information is accessible to the right employees at the right times. This helps ensure your deduction teams can review invoices, reference proofs of delivery (PODs), look into specific disputes and more.
Focus on the Right Deductions
Automating data extraction and other parts of deduction management enables your teams to put their focus in the right places. That means you can prioritize a higher outstanding balance while automatically validating and addressing smaller payment problems.
Look Beyond Deductions
Although DDO improvements often require DDO solutions, that’s not always the case. Sometimes, an invoice error may be to blame — for example, an incorrect total amount leads to a customer paying less than they owe without realizing it. Similarly, delivery problems or even issues with quality control can impact your DDO. As such, it’s smart to look beyond your deductions team — and even your AR department — to contextualize your DDO outcomes.
Improve Your Days Deduction Outstanding and Other AR Metrics
If you want to improve DDO, protect cash flow and boost revenue, you need to take two key steps:
- Capture data reliably, effectively and accurately.
- Leverage that data in the right places at the right times.
Many AR solutions split up these processes, sometimes requiring different tools or systems — which quickly leads to bottlenecks, inefficiencies and integration gaps. The best way to overcome these challenges is to use software that keeps your AR workflows all in one place.
That’s what Carixa is capable of.
Our AR automation software extracts, tracks, analyzes and utilizes data from customer, retailer and carrier portals and other platforms. Through effective algorithms and powerful RPA, Carixa can help you address deductions and understand their impact by comparing and managing other AR workflows. From deductions, credit and collections automation to trade promotion management and more, it’s the Order-to-Profit system.
To learn more about Carixa and what it can do for your AR department, schedule your consultation today.
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