Supplier rebate agreements are often based on the volume of purchases of particular products. This means that in order to accurately calculate the rebate that should be accrued or collected, and to minimize the chance of disputes with suppliers it is crucial that your rebate calculations are based on accurate data.

When choosing which data to use for your supplier rebate calculation, you will likely be considering the three following options. Unsurprisingly, each of these choices have advantages and disadvantages to consider depending on your internal systems, business processes and priorities.

Let's dive in and take a look at the pros and cons.

What data should you use to calculate rebates?

Purchase orders

A purchase order is a commercial document issued by a buyer to a seller indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.

Pros:

   
• Quickly available;
   
• Produced and controlled within your own systems;
   
• Line level granularity.

Cons:

   
• May not accurately reflect goods and monies exchanged.

Goods receipts

A good receipt is a commercial document acknowledging that a person has received money or property in payment following a sale or other transfer of goods or provision of a service.

Pros:

   
• Available once goods are delivered, before invoicing;
   
• More accurate view of goods received and monies to be exchanged.

Cons:

   
• May not be fully digitised at the line level;
   
• May still be subject to error or adjustments that occur between delivery and payment.

Purchase invoices

A purchase invoice is a commercial document presented to a buyer by a seller or service provider for payment within a stated time frame to prove that something was bought and how much was paid for it.

Pros:

   
• The most accurate record of goods and monies exchanged;
   
• Generated by the supplier so disputes are less likely.

Cons:

   
• May be a delay to receive the invoice;
   
• May not be reconciled with purchase orders at the line level and therefore lack granular detail.

Making sense of this

It is possible to use a hybrid approach to rebate calculation if your processes support it. This involves using your purchase order records to gain an early insight into the expected rebate earnings, and then replacing these with goods receipts or invoices at a later point in order to increase the accuracy of the estimates.

This has the potential to complicate the procedure, but can lead to a great situation where you have both early visibility that then improves over time.

Of course, another important factor when deciding on the data to use will be the location and ease of access of the data within your systems.

What is the role of a rebate management system?

Whichever data set you are using, you will need to use this to calculate the rebate earnings that are due.

We sat down with Peter Hindle MBE, an expert from the building materials sector, to talk through the way leading manufacturers and distributors are using rebate management software. You might find this video useful if you've just started researching how rebate management systems work.

Conclusion

The first step after deciding which set of data you are going to use to run your rebate calculations will be to assess the practicalities of getting that data into your rebate calculation process. If you use a rebate management system then this can be handled by an IT process to set up data feeds. If rebate calculations are performed manually then it may be the case that the team involved will need to retrieve data from the necessary systems manually in order to begin calculations.

Remember, taking better advantage of the data you already have is usually much cheaper and faster than improving data quality.

Further reading

To some, income from special pricing agreements, rebate agreements or market development funds is treated as a ‘bonus’. But to other companies, these rebates form a significant proportion of their revenue and therefore warrant accurate management.

How can you ensure you keep track of your rebate contracts effectively and reliably?

Our guide will give you all the information you need to implement a structured approach to effectively managing rebates and complex trading agreements.