Businesses managing complex trading agreements can face various accounting mistakes that are difficult to overcome entirely when using manual processes and spreadsheets. Lack of transparency, inaccuracy and limited control of rebate accounting processes is common and the ramifications of these can have a damaging effect on profit, compliance, cash flow and business growth. For example, an accounting mistake that supermarket retailer Tesco made meant a £129m fine to avoid prosecution by the FCA for overstating its profits in 2014. The root of the problem is believed to be premature recognition of rebate income from suppliers. Solving these rebate accounting issues for retailers, wholesalers and large buying groups, is critical to ensure receipt of the correct amount of rebate income and achievement of mutual trading goals. So, what are the common rebate accounting mistakes and how can they be avoided?

1. Poor visibility of rebate accounting agreements

Can rebate earnings be tracked easily? Is it clear what those earnings should be and what stage of each deal your company is at? Do your sales people truly understand the net price of products that they are quoting for? Do your buyers agree rebate deals that can actually be systematized and monitored, or are some parts of your trading agreements stored away in filing cabinets? To avoid rebate accounting mistakes, the definition of each contract should be clear across all the relevant departments in your organization — finance, buying and sales. Finance teams need to be able to view rebate earning and log cash collections, whilst commercial and purchasing departments should have a financial system in place to input purchase data and model proposed deals. To provide that visibility and avoid further accounting mistakes, we recommend:

• Systematically record every aspect of every trading deal and make that information available to all parties
• Have the ability to record all purchases against the appropriate agreements so that at any time the correct rebate claims can be made, net pricing can be assessed, and targets can be reviewed
• Electronic sign-off of rebate agreements helps to ensure that there are no misunderstandings between all the parties involved
• Real-time access to rebate data that assesses performance against each deal is essential to ensure that your business capitalises on the rebate agreements in place.

2. Confused audit trail

Once a contract is in place for rebate accounting, a major concern is often the ongoing visibility or audit trail. Manual auditing of contracts and rebate income brings with it the inevitable risks of omission, delay and error, which can cause discrepancies in between supply and purchase records and lead to rebate accounting mistakes when making rebate claims. Internal and external audit processes have to be clear and accurate.  As well as avoiding lost rebate income, good audit processes avoid the time and therefore the cost of dealing with disputes and provide clear evidence for reviewing retrospective trade agreements and rebate income. A clear audit trail can also help buyers to negotiate smarter deals. By having clear evidence of actual purchase history, buyers are in a position to work with suppliers to negotiate better rebate deals next time around. Good rebate accounting processes aren't just about claiming the right amount of rebate. By giving true visibility to buyers, a rebate management system helps buyers negotiate better rebate deals and avoid any accounting mistakes.

3. Stop relying on spreadsheets and manual processes

If your organization uses Excel spreadsheets to hold all the rebate deal data for each product, supplier, customer and the multiple combinations of these, it can take a substantial amount of time and resources to pull together reports. Where trade agreements are complex, manual reporting is time consuming, prone to error and often struggles to deliver accurate data, rebate accounting mistakes are bound to happen. Implementing a rebate management system that automatically generates reports helps to improve accuracy and therefore profitability and cash flow.

4. Missed rebate accounting opportunities

Trading agreements can be in place for considerable periods of time. Data needs to be up to date and accurate all the way through the rebate deal lifecycle, which can be a huge challenge. Without data accuracy and clarity, it’s highly likely that the full value of earnings will not be received, affecting cash flow and profitability. Complex trading agreements, if not managed correctly, can represent a significant risk to the business and result in accounting mistakes.  If your business models its profitability and cash flow based on those trade agreements and then fails to obtain the rebates they planned for, the business is effectively failing to meet its targets. Failure to meet deal criteria, missed contract renewals and audit trail problems all mean that the business could be missing out on purchases that would actually reduce costs!  This is particularly true where tiered rebates are in place.  A good rebate management system should provide automated alerts to flag up the opportunities that are easily missed in a manual accounting system.

The consequences of poor rebate accounting:

• Disputes over the terms of trading deals
• Disputes over rebate calculations and claims
• Difficulty monitoring performance against all aspects of supplier deals
• Hand-crafted solutions using spreadsheets
• Reliance on a few people who know how to manage rebates
• Deals failing to meet their objectives

Whilst the first five symptoms result in rebate accounting mistakes which in turn can impact auditability and profitability, it is the last point that can actually provide a more significant impact to the bottom line. The inability to calculate the net-net price of goods when comparing one supplier against another can lead to missed opportunities to reach volume discount thresholds.

How a rebate management system can prevent rebate accounting mistakes

An increasing number of retailers, wholesalers and large buying groups are replacing their manual rebate accounting processes with rebate management system packages that track supplier rebates, calculate retrospective discounts and automate alerts and reporting. Meaning they should hopefully prevent any accounting mistakes further down the line. Rebate management systems that provide robust governance practices, reduce the risk of manual error, strengthen internal controls and fuel mutual growth for businesses and their suppliers should be music to the ears of Financial Directors. Some rebate management systems include a collaborative online portal enabling internal sign-off of deals and ensuring that suppliers share a common version of these trade agreements: the performance of each deal is completely transparent for both parties. Integration to all your systems that are used to purchase goods is essential. These automated feeds of purchase information against each rebate deal provide an accurate audit trail, therefore accounting mistakes should be avoided. Finally, automated reporting and alerts avoid inefficiencies and lost opportunities. The time and cost of managing rebates will be reduced — in many cases, significantly. Discover more about the features and benefits of our rebate management system by clicking here.