7 Common Problems with Accounting for Rebates

7 Common Problems with Accounting for Rebates

As experts in rebate management, we have come across (and have helped to fix) many problems with rebate management spanning commercial, financial and operational processes.

In this article we focus on the financial side where most issues revolve around accuracy, predictability and auditability. These are usually among the key drivers of our customers' business cases in defining their requirements and selecting Enable to manage their rebates.

In our experience, when our customers get these financial areas right, they win the battle for trust and confidence in their figures, thus allowing commercial and operational teams to make better, more profitable trading decisions.

Accounting processes vary widely between businesses, in particular because there is no rebate accounting standard to strive for and ERP systems generally cannot cope with the level of deal complexity involved. However, in implementing Enable we have discovered seven areas where specifically accounting for rebates can be a problem.

We'd like to share these to help you avoid the associated pitfalls!

Rebate accounting problems

1. Understanding the rebate agreements

Core business systems are often inadequate for capturing and representing agreed rebate deals. Add in the subjectivity that rebate agreements can be viewed with and the result can be a misaligned understanding and incorrect calculation of amounts due.

Without a true connection with the commercial team to understand the deal, finance teams can be left guessing and are unable to accrue the correct amount or match payments to the deals. This in turn makes correctly showing rebate on income statements more challenging and it slows down the whole rebate accounting process!

With Enable's rebate management product the deal itself is originated from within the system. This means there is no chance of these disconnects happening and further, any updates or changes to the deal mid-period are automatically captured accurately.

2. Managing accruals in rebate accounting

An accrual is the expectation of income at a later date. Deal terms specify payment frequency which may mean one deal needs to be accrued for and values agreed several times during its life. Perhaps the biggest challenge is accruing for tiered incentives and deals which are ‘strung’ -- one calculation relies on others earlier in the chain.

Estimating the value, you are likely to spend with a trading partner over a given agreement is difficult without extensive reporting and forecasting functionality leading to incorrect estimates of value. With Enable rebate accounting software the standard reports suite and executive summary functionality allow these financial estimates to be more accurately assessed.

3. Rebate realignments

Reversing accruals when payments have been received is common practice. But what happens when your accrual for a large period of the year is too large or too small? This will inevitably happen in areas where estimates and forecasts are required for tiered deals, mid-period changes and any data inaccuracies.

Where the rebate accrual is not correct, a rebate realignment is required which can create a spike in the income statement to move your year-to-date average back to the right level. If that is not fully explainable then trust and confidence in the figures will be eroded.

Your company needs to have complete confidence in their accounting accruals process to ensure they are not overstating or understating profits at different periods throughout the year.

4. Managing rebate in stock

When a rebate amount is received from a supplier, the value of stock for those products is reduced to a new, lower, net-of-rebate cost. It is important to track and accrue this amount accurately in the balance sheet, because rebate in stock cannot be released to the P&L until the stock has been sold.

This process can be hard to manage when large volumes of rebates are being received at one given time and products are regularly being moved through supply chains. Complexity is further increased when products can be sourced in different ways and mapping to product codes is required.

5. Errors in the balance sheet

Incorrect rebate accounting procedures, such as failing to regularly reconcile balance sheets to sub-ledgers can reduce accuracy on which the business relies and also raise audit concerns considerably. Rebate errors can remain unnoticed and unresolved until too late to adequately rectify.

An error in the balance sheet at the year-end can lead to a rebate debtor being uncollectible and an adverse impact on the next financial year.

6. Releasing to the profit and loss (P&L)

As touched on with managing rebate in stock, rebate can only be released to the P&L when stock has been sold to a customer. This means companies must track products to agreements and stay on top of sales data and ensure it is matched properly.

7. Determining the correct financial period

A business should match expenses and revenues in the same accounting period to show the full effect of a transaction in that period. Financial periods are vital as the majority of a company's trading relies on it -- from purchasing and rebate agreements, to sales, to seasonality cycles, all the way through to annual tax returns.

It is important to make sure entries are recorded in the correct financial period. Some financial systems prevent closed periods from being altered at all. When a closed period is incorrect, this means the following period has to also be incorrect to account for the previous error.

More on rebates

Hold your rebate accounting processes to account

In our experience the above are the main financial accounting reasons that any lack of visibility or accuracy of profit margin can cost your business. The true benefit of each rebate agreement needs to be understood to give your business the ability to enter negotiations with the relevant information. It is vital to be fully prepared when negotiating rebate agreements in order to ensure you can gain the maximum benefit possible. It is difficult to do this if your accounts tell an incorrect story about the rebate agreements of the past.

It is likely that rebate income is going to slip through the cracks and be missed unless a complete end-to-end solution is implemented to handle your rebate accounting processes. Companies can have whole teams dedicated to negotiating and managing rebate, however a disconnect between the teams can lead to accounting errors, you need to understand what was agreed and what is owed.

Processes need to be regularly reviewed and the systems in use should be regularly assessed to determine whether they really provide the capability and accuracy required or whether they are convoluted and impeding business operations.

How can a rebate management system help with accounting for rebates?

With a dedicated end-to-end rebate management system, you will have all the data required to manage your rebate accounting accurately whichever way your company decides is best.

  • Do you want to raise invoices to assist in the success of raising a claim?
  • Do you want to accrue accurately for tiered rebate agreements rather than accruing at the lowest rate?
  • Do you want to have complete confidence in your rebate accounts process?

A rebate management system can provide your business with truthful data, helping to bridge the gap between disconnected or broken processes and give your finance team the freedom to focus on managing rebate properly.

One thing a rebate management system should never try to be is a finance system or ERP, but there is no denying that rebate is very much involved in the financial world. When choosing a rebate management system try not to find one that aims to do too much or imposes on your established essential ERP and finance systems, try to find one that compliments them and can work in harmony.

David Hunt

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