How improving the transparency and frequency of accruals and reporting reduces the likelihood of overspend and underspend shocks.
Trade accruals have been an ongoing pain point for sales and finance teams since time immemorial. Given that trade spend is the greatest CPG company outlay after cost of goods, percentage point errors in accruals can result in nasty month-end and year-end ‘surprises’ to the tune of millions of dollars. The negative impact on trade promotions revenue management can be huge.
Yet many CPG companies still manage accruals manually, expositing themselves to risks. A poll we conducted recently indicated that 77% of the audience had at least some elements of their accruals process that was manual. Just under one quarter (23%) had automated their accruals process.
Promotion perils and pitfalls
Manual accruals processes typically have reduced visibility for sales and finance, as there’s not necessarily a single line of sight or source of truth. There can also be a lag effect on cash flow visibility based on when manual inputs are made, and this is exacerbated if the trade promotion management system – even where automated – is not integrated with the company’s invoicing ERP.
The method for accruing can also result in nasty surprises. You would think that live accruals of case rates would present the most accurate picture, but with high/low promotions it can be difficult to align volume to spending due to the delay in which spending to volume hits the general ledger. This can make it hard to discern accruals of current versus prior year. Forecasting accrual numbers based on historic results, such as last year’s, may not take into account incremental promotions, events and products this year over last year. Or additional trade dollars may be accrued but not deployed.
Either way, the name of the game is to reduce two key accruals surprises: underages, which negatively impact financials as unplanned spend, and bottom-line benefitting accrual overages that are actually an opportunity cost of not having invested and driven volume.
How do you go about this?
What good looks like
First up, the right accrual methodology. Spending accruals, which are spending liabilities owed but not expensed to the general ledger, are the most conservative approach and considered best practice with accrual accuracies of +/- 0.1%. Once the manufacturer and retailer have agreed the promotion conditions, they are entered into the TPM application, which maintains the spend liability metric. The application is updated with actual invoiced volume, and further actual expenses and promotion revisions are entered. These may impact the spending accrual as partial settlements.
Secondly, automated, specific, and frequent reporting on accruals, spend, balances, and actualizations. Review direct accruals versus actual spend, including balance and settlement, by individual promotion activity. This enables evaluation and adjustment. Likewise, accrual analysis reports of accrual rate versus spend, evaluated in real time, allow for midyear adjustments. Accrual rate versus spend analysis by program and across programs in order to adjust based on higher value programs to avoid over-accruing. More granular monthly accrued and paid reports by program, distributor and product help identify trends and guide future forecasts. Invoice level reports show accruals by invoice for given time periods; these help with month-end close-outs.
Thirdly, in order to automate inputs, metrics and reporting, invest in a trade promotion management (TPM) system. This increases accuracy by calculating daily, weekly and monthly accruals against current month invoices and interfaces the accrual rate with your ERP. It reduces labor and replaces manual processes with system-generated accrual postings and reduces user-input error risks. You can post accruals at multiple levels of product hierarchies, and at the customer and product level enabling customer net revenue and accrual views at any time. You also can create blended average operator trade accruals. And importantly, set up automated reports for various times throughout the month, quarter, and year.
The TPM application provides the single line of sight for the entire trade marketing plan and contains budgets and objectives to compare to results.
It’s something of a cliché that what gets measured gets managed. By employing a spending accrual method, analyzing and reporting regularly and using TPM application to manage it all, you can make better forecasts, adjust on the fly where needed, and improve your accruals accuracy. Thus, avoiding those month-end and year-end accrual ‘surprises’.