Rebate Calculations 101: How Are Rebates Calculated?
Rebate calculations are a fundamental part of the rebate management process. If you don’t calculate your rebates, you won't be able to claim and pay out on your rebate programs – meaning any chance of maximizing your margins and growing the business become non-existent. But spreadsheets are clunky, slow and prone to human error, and ERPs can be just as bad. Luckily, there is an easier way to manage your rebate calculations. This blog will explain the process of how rebates are calculated, specifically by Enable.
Who is Involved in the Rebate Calculation Process?
Most companies who deal with rebate calculations have several stakeholders involved in the process:
• Members of the commercial team who negotiate contracts
• The buyers who place orders under those contracts
• Team members responsible for sales and pricing
• Rebate managers/accountants who work out what to claim
• Other members of the finance team
• The suppliers
As you can see, that’s a lot of people, and a lot of people means myriad processes and data need to function flawlessly to ensure that rebate calculations are accurate. Subsequently, it’s very easy for things to fall through the cracks, ending with rebate payments and claims being unfortunately missed. Here’s an example from our customer, Matt Freedman, Director of Finance at General Plumbing Supply:
“I’d say the events that really pushed us to start looking for a solution was when we realized we were owed a rebate of $500,000 that we did not receive. It really solidified my thoughts that we needed a better solution. I’d say, perhaps it was just fate, but it was at that point we were introduced to Enable, the timing was just perfect.”
How are Rebates Calculated Manually?
The ability to accurately calculate and track rebate program earnings and forecasts is fundamental to reliable rebate accruals and maximizing the incentives built into rebate agreements.
Many businesses start out calculating rebates using spreadsheets. However, as rebates grow in complexity, spreadsheets have proven to be error-prone, unsecure and hard to maintain, creating data silos, discouraging collaboration and losing income. We find that companies managing rebates in spreadsheets typically fail to collect 1% of rebates owed — an average of $218,829 annually. That will make a huge difference in your bottom line!
Errors are the main issue that can hinder correct rebate calculations they can expand from copied and pasted cells, mistakes in formulas, added rows and columns and worst of all version control. When multiple email exchanges with spreadsheets attached are being passed back and forth with various tweaks and formatting changes, you open up the possibility of more errors.
What Types of Deals Can Be Calculated Within Enable?
Enable is the system of record for rebates, and we cater to virtually every conceivable deal mechanism that exists: product specific, location specific, defined time periods, tiers, different units of measure and so on. With over 300+ deal types already represented on our system, you know your rebates are in good hands.
Some examples include:
Paid out based on growth of either the group or individual members based on previous years spend. For example, grow between 1-5% and get 2% rebate (either on all spend, or just the growth portion).
This is where the target turnover is different to the earning turnover. This means that the rebate earnings due to be paid are calculated via various incremental targets based on a growth rate on top of last year's turnover, where the turnover that is eligible for the rebate doesn't include turnover eligible in other deals. Further to this, the turnover used to determine the target rates can be different to the turnover used to determine the earnings.
How Are Rebates Calculated Within Enable?
Our rebate management system has been continually developed since 2016 to accurately calculate rebates, regardless of how complex the agreement is and how many trading partners are involved.
Step 1: Import Your Granular Data
To begin calculating your rebates, primary data is needed, and the more granular the better. By this, we mean data that is at the lowest level possible and cannot be broken down any further. This acts as a master data set that Enable can use to assign entities like products to deals or is used to generate granular reporting.
Step 2: Trading Programs and Program lines
Within Enable, we have trading programs. Each trading program is a single, contractual agreement between you and your trading partner. These capture the timelines, terms and conditions and a description of the rebate calculations being agreed upon.
Within these trading programs are program lines that act as individual calculations (via a mechanism) which can be applied to specific sets of business entities. For example, each program line could apply to a different product/SKU set for different locations. A program line is not fixed to the same time period as the deal and each program line can have different payment frequencies.
Dimension items can then be assigned to each program line, which is done through selection rules. These are crafted to your requirements when we onboard you into the system. Alongside this, we also utilize mechanisms to drive our rebate calculations. There are a wide range of mechanisms available including fixed amounts, percentage returns and per-unit rates, and we can apply these as single or multi-tier.
Once your trading programs are set up, our software will calculate rebate earnings at a granular level for your team to access, either as standing debt or credit in our Finance App or through our Executive Dashboard so that you can make strategic decisions.
Step 3: Transaction Lines
A transaction line is the record of a transaction between your business and a trading partner. This record contains key details, such as:
- The date of the transaction
- The number of units sold
- The value
- Currency used
- Product, branch and delivery type
Enable then reconciles your transactions with its primary data records. This process then assigns transactions to the program lines they effect, and Enable will update accordingly.
Step 4: Unlock Enable – Finance App
The Finance App within Enable allows you to record and track payments received from trading partners against calculated earnings.
There are many features within this including:
- The debtors’ report, which allows you to see all debt owed to your business by a trading partner. When payments are uploaded and allocated, the receipt of this payment is reflected in the debtors' report by deducting it from the total debt outstanding.
- The creditors’ report, which allows you to browse and filter a list of trading programs in order to provide a summary of the due and overdue rebate.
- The payment allocation report, which shows the individual program lines and the balance due for each, as well as any adjustments made to this balance and payments recorded against it.
- The payment history area, which acts as a finance app specific payment activity log.
As you can see, Enable allows you to automatically calculate and track your rebate programs in real time so you never lose out on essential revenue and can claim every penny.
Benefits Of Accurate Rebate Calculations
You’ll be pleased to know there are many benefits to calculating rebates with the correct data and increased visibility:
- Boost financial performance: Once you have the correct rebate calculations you can turn these into actionable insights which reveal paths to increased margin, profitability and sales.
- Adhere to compliance: Accurate rebate calculations guarantees that your business is compliant with the law and regulations required by government agencies.
- Accelerate cash collection: If you wait for suppliers to calculate and pay your rebates, you’re delaying the arrival of cash into the business. By calculating and invoicing for rebates as soon as they’re due, you can boost your cash flow and potentially avoid borrowing costs.
- Accelerate rebate payments: Have you incurred any late payment fees or missed any early payment discounts when paying rebates to customers? Accurate rebate calculations can ensure you always pay on time and take advantage of any early payment discounts.
- Pursue new opportunities: Once you have a better overview of your rebates, it is much easier to plan and predict the future. When you are confident in your data, you can solve issues quickly and you can grab any opportunities that present themselves, without having to fear rebate miscalculations.
- Less trading partner disputes: When both parties have visibility for their deals and agree on the rebate calculations being paid out or claimed there is less change of disputes.
Now is the time to say farewell to spreadsheets and start automating your rebate calculations with the help of Enable. Schedule a demo