7 Common Problems with Accounting for Rebates

7 Common Problems with Accounting for Rebates

We have come across many problems with rebate management spanning commercial, financial and operational processes. Today, we’re focusing in on the financial side of rebate management, where most issues revolve around accuracy, predictability and auditability. When businesses get these financial areas right, they win the battle for trust and confidence in their figures, allowing commercial and operational teams to make better, more profitable trading decisions.

Accounting processes vary widely between businesses. This is likely because there is no rebate accounting standard to strive toward and ERP systems generally cannot cope with the level of complexity involved in rebate deals. These are just a few of the challenges that finance teams accounting for rebates face.

Over the years, we have discovered seven areas where accounting for rebates can be a problem. In this blog, we’ll walk you through each of these obstacles to help you avoid the associated pitfalls.

Problems with Rebate Accounting

1. Understanding the rebate agreements

Core business systems are often inadequate for capturing and representing agreed rebate deals. When you add the subjectivity that rebate agreements can be viewed with into the mix, 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, unable to accrue the correct amount or match payments to the deals. This in turn makes correctly showing rebates on income statements more challenging and slows down the whole rebate accounting process.

With Enable's rebate management product, the deal itself is originated from within the system, eliminating these disconnects and accurately capturing any updates or changes made to the deal mid-period.

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,” meaning 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, frequently resulting in incorrect estimates of value. However, with Enable’s rebate accounting software, the standard reports suite and executive summary functionality allow these financial estimates to be assessed with greater accuracy.

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.

If your rebate accrual is incorrect, a rebate realignment is required. This process 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 lower, net-of-rebates 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 erode the accuracy on which the business relies and even raise audit concerns. Rebate errors can remain unnoticed and unresolved until too late to adequately rectify: an error in the balance sheet at 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 to 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 them: 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, the following period must also be incorrect to account for the previous error.

Improving Your Rebate Accounting Processes

Hold your rebate accounting processes to account

In our experience, the financial accounting obstacles above are the main 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 so that your business can enter negotiations with relevant, accurate information. It is vital to be fully prepared when negotiating rebate agreements to ensure you can gain the maximum benefit possible – but this can prove difficult if your accounts tell an incorrect story about the rebate agreements of the past.

Rebate income is likely to slip through the cracks 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 rebates, but a disconnect between those teams can lead to serious accounting errors – you need to understand what was agreed and what is owed.

Your rebate accounting processes need to be reviewed often and the systems in use should be assessed regularly to determine whether they really provide the capability and accuracy required – or whether they are actually slowing 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 have all the data you need to manage your rebate accounting with accuracy and confidence.

  • 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 withtruthful data, helping to bridge the gap between disconnected processes andgive your finance team the freedom to focus on managing rebates properly.

Learn more about how Enable can support your rebate accounting needs at https://enable.com/solutions/rebate-accounting.

David Hunt

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