Days Deduction Outstanding (DDO)

A KPI that measures the financial efficacy of a firm in resolving its deductions

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Christy Grimste
Christy Grimste
Christy Grimste
Real Estate | Investment Property Sales

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family REIT. Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her MBA and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Last Updated:January 12, 2024

What is Days Deduction Outstanding (DDO)?

Days deductions outstanding is a key performance indicator that measures the financial efficacy of a firm in resolving its deductions. It measures the financial health of a firm in relation to accounts receivable (AR) and has major implications regarding its profitability.

A deduction in accounts receivable mainly occurs when a client does not cover a full invoice payment. The unpaid amount results in available deductions, as the firm knows that the more time passes, the harder it gets to resolve deductions. 

Those overseeing accounts receivable should invest in resolving their open deductions since the longer the deduction stays open, the larger the DDO will be. 

DDO is calculated by dividing the value of deductions outstanding at the end of a period by the average amount of deductions received per day.

Days Deductions Outstanding = Value of outstanding deductions at the end of a period / Average daily received deductions

For example, if deductions for OrganiCo amounted to $30,000 at the end of March, knowing that the average assumptions received per day during that period are $3,000, then DDO for OrganiCo is ten days.

In other words, it took OrganiCo 10 days to resolve their accounts receivable, on average. This is a simplified example; real-life examples can be more complicated according to the industry, economy, or efficiency of a firm.

Key Takeaways

  • Days deductions outstanding is a key performance indicator that assesses the financial healthiness of a firm. It measures its ability to close open deductions.
  • Days deductions outstanding is calculated by dividing the value of overall deductions during a period by the amount received per day.
  • The lower DDO is, the more a firm's deductions management is effective at resolving accounts receivable.
  • Major inefficiencies in workplaces may cause DDO to increase, but automating the information flow helps improve it.

How to interpret days deductions outstanding (DDO)

As demonstrated in the formula and example above, we can conclude that a low DDO is desirable. A low day's deductions outstanding means that a company was quick to resolve its deductions, reflecting its financial efficiency.

On the other hand, a high DDO demonstrates that a company took a longer period to resolve its deductions. This reflects a firm’s inefficiencies in tracking and resolving accounts receivable.

Organizations with high DDO should examine the causes of their inefficiencies as it affects their profitability. Firms with thin profit margins might end up unable to contribute profits as they are not receiving their revenues in full payments within the period of the sale. 

A high DDO can also affect the cash flow of a firm. If the DDO is high enough, some cash inflows may take more than one accounting cycle to be resolved, resulting in an inefficient and possibly unprofitable organization.

What are the causes of a high DDO?

A high DDO can be caused by many factors that can be internal or external to the firm. 

Below are the major reasons behind open deductions:

1. Invoicing Errors

Customers refer to invoices issued by organizations to pay their bills. Errors in invoices can make DDO higher. If a customer receives an invoice stating the wrong balance, they will end up overpaying or underpaying their invoices.

Clients, in this case, cannot be blamed for underpaying their invoices, as they referred to errored data provided by the organization. Thus, an organization should invest in giving correct invoices and in communicating with clients in cases of errors.

2. Lack of Communication

Lack of internal and external communication may result in delayed payments, leading to a high DDO. 

For example, customers may be delayed closing their accounts because of a lack of collaboration between departments. If the invoice has slowly proceeded within departments, it will be delayed to customers.

Also, customers may not be covering their payments because they are simply not reminded to by the deductions management.

3. Quality of goods and services provided

One reason that may result in delayed payments is a lack of customer satisfaction. Customers may delay their payments when not provided with the quality of goods and services they desire. Such dissatisfactions may result in open deductions, leading to a high DDO.

Thus, firms must do their best to meet customer expectations and provide them with the quality of goods and services they desire. 

4. Other external factors

There might be some external factors that the management has little to no control over. For example, it can be an economy-wide issue. If a firm is operating in an economy that is suffering from a financial crisis, clients may face financial difficulties closing their accounts. 

Another factor can be a lack of client selectivity. An organization should not deal with a client that has a negative history involving paying bills on time. 

How to reduce dDO?

Decreasing DDO is an essential step to increasing the financial efficiency of an organization in collecting its receivables. 

Most of these steps can be taken internally to facilitate the deductions management workflow:

1. Initiate a central repository of data

When working on resolving deductions, a lot of data and documents are needed. Usually, team members spend a lot of time reaching out to internal departments and customers to discover the data required. 

Thus, creating a central repository of data that includes all needed documents in an organized manner will save time for team members and help them resolve deductions faster. The CRD can include bills, delivery documents, shipment proofs, warehouse reports, etc.

2. Design automatic replies

According to a McKinsey analysis, professionals spend 28% of their working time on emails. In other words, more than a quarter of employees' time is spent reading and answering emails. 

So, to decrease this percentage sharply, you can design automatic email reply templates for different scenarios. This will not only increase team collaboration and efficiency; it will also increase customer satisfaction as it will save their time with near-immediate responses.

3. Automate reason coding

Automating reason coding will save your team's time, helping them concentrate on more essential tasks. This is critical as the process of matching customers' reason codes manually can be time intensive.

4. Use a deduction validity predictor and tracker

Separating valid deductions from invalid ones can be extremely time-consuming. Thus, you can initiate deductions, validity predictors, and trackers to save time on the separation process. The team will end up investing more of their time in working on more profitable tasks.

Researched and authored by Mohamad El Hayek | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

Uploaded and revised by Omair Reza Laskar | LinkedIn

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