Rebate management explained

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Rebate management explained

The Deal EconomyJune 17, 2019

Introduction

Rebate management is the process of recording supplier agreements, tracking purchases and sales against those agreements, and managing accruals and rebate claims in a timely manner.

Proper rebate management can be a headache for any business, regardless of the scale of their rebate programs. Often, whole teams are dedicated to using legacy systems to follow inefficient processes, reducing productivity and negating the intended benefit of the rebate agreements commercial teams have negotiated brilliant terms for.

For small to medium businesses, rebate can make up the majority of their profit and for large businesses even a small improvement in process can lead to the discovery of millions of pounds, therefore it’s essential for any company who are regularly involved in rebate to scrutinise their current rebate management process and consistently strive to improve.

Before we dive into more detail on the topic of rebate management, let’s look at some of the basics concerning rebate — what is it exactly and why do companies rely on it?

What is a rebate?

A rebate is a retrospective financial payment used as an incentive to drive sales growth without simply reducing the quoted price by offering a discount. It is a payment from a seller to a buyer after the buyer has purchased specified goods at an agreed combination of locations, quantities or values from the seller. Don’t forget though that rebates, unlike discounts, are given after payment, so they are fundamentally different.

How rebates are used between a supplier and a merchant

Rebates are essential to operations in various industries including building supplies, electronics, retail and wholesale distribution and can be offered to certain locations, on certain products or product groups and on certain types of transaction. This means that they can get rather complex, which begs the question if they are so complicated then why do all these industries need rebate programs in the first place?

What is the purpose of rebate?

Rebates are a way of encouraging loyalty over a certain time period, which helps to incentivise trading with one specific trading partner over others. These types of rebate agreements are typically tiered where increased spending leads to increased rebate rates.

Further to that, rebates are used because offering a discounted invoice price will often lead to the discount being passed on to the customer causing eroded margins in the industry. They are also used in certain industries to avoid offering a cheaper listed price through fear of diluting a company’s brand.

Rebates help with loyalty and protection

Finally, rebates are a way for the company offering the discount to protect themselves against changed order volumes, as the economies of scale that initially drove the offered discount may mean that the discount is no longer viable at this new order quantity. For example, a cheaper price per product may be more viable if a company buys 10,000 items than if the company only bought 10, so rebates are a good way to ensure the cheaper price is only given to the customer after they have made the purchase, rather than giving the discount upfront as a reduced purchase price.

Now we know a bit about what rebates are and how they work, let’s look at the parties involved in rebate management. Rebates are essentially viewed from two perspectives: vendor rebate (also known as supplier rebate) and customer rebate, where the perspective on the rebate agreement is different between the two.

What are vendor rebates?

Vendor rebates are most common for merchants and distributors. They are rebate agreements where rebate payments are received from a supplier. You will deal in these types of agreements if accounts receivable is involved and you are on the purchasing side of a particular rebate agreement.

What are customer rebates?

Customer rebates are most common for manufacturers and merchants. They are rebate agreements where rebate payments are paid to a buyer or customer. You will deal in these types of agreements if accounts payable is involved and you are on the selling side of a particular rebate agreement.

What is an example of a rebate?

There are many different types of rebates depending on the trading partners involved and the industry that they operate in. The easiest example of a rebate would be a fixed monetary amount that is guaranteed to be paid at the end of the agreement.

Another common example can be where rebate earnings are a fixed percentage of turnover. The terms of an agreement will outline which turnover is eligible for this agreement, perhaps specifying a combination of certain branches or divisions, certain products or product groups and certain types of transaction.

A more complex example of a rebate is a strung and tiered growth-based rebate 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.

Many more flavours exist; too many to run through them all — but you can certainly see how it gets complicated and why it is so important to have a rebate management system in place!

What are the benefits of using a rebate management system?

Here are some of our clients’ proven benefits of using a rebate management system over managing rebate manually:

  1. Simplified and more efficient processes due to automation.
  2. Minimal disputes and easier identification of the causes of disputes through accurate audit trails, allowing for faster resolution.
  3. Improved cash flow due to timely accurate rebate claims.
  4. Improved margin due to more accurate rebate and pricing calculations.
  5. Automating processes frees up finance and commercial teams to increase productivity in other areas.
  6. Better supplier collaboration leading to improved profitability and growth.

Businesses gain significant ROI for a rebate management system if their profit margin includes a substantial amount of rebate claims and/or the annual value of rebates claimed exceeds the equivalent of $5,000,000 USD. There is no real way to measure the impact of increased time for employees of these companies and how this has been utilised to identify better commercial opportunities and increase sales to further increase the ROI of a centralised rebate management system.

A rebate management system allows you to accurately systemise and automate every element of a rebate deal, including:

  1. The ability to record any type of pricing agreement e.g. ship and debit, retrospective tiered discounts, strung rebates, special pricing agreements, growth-based rebates and more.
  2. Automated tracking of purchases and sales against agreements.
  3. Automated accruals recording.
  4. Automatic invoicing/supplier debits.
  5. Extensive and granular reports.
  6. Forecasting that accounts for seasonality and specialist industry knowledge.
  7. Commercial modelling to better assist negotiations.
  8. A reliable and extensive audit trail.
  9. Internal approval workflow with an integrated external trading partner sign-off.

Conclusion

Rebate management should be a key focus of all involved in rebate, regardless of the industry that they operate in or their role in the agreement. Systems that manage supplier and customer rebate should offer all of the benefits outlined in this article above in order to provide maximum benefit.

It’s important to remember that the benefit of rebate management extends far beyond simply having an automated calculator to improving efficiency and processes as a whole and freeing up teams to improve productivity.

It can be easy to neglect rebate and operate under the assumption that your current process is handling the situation, however all too often companies are finding out that this assumption is incorrect and has been for a while.

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