Like a bad holiday movie that reruns every year, three months from now the accounts-receivable staff in many CPG manufacturers will record large unexpected short-pays. After weeks, sometimes months of research, these ‘surprise’ deductions will be identified as valid settlements for promotions. The finance team will scramble to minimize the financial damage to the company’s pro-forma P&L. The sales team may lose valuable trade funds from the current year to ‘pay’ for last year’s overspend. With a reduced trade budget, now the current year’s sales volume target is in jeopardy! This is a CPG re-run without a happy ending.
Unfortunately, anyone that’s worked for a CPG manufacturer has probably lived through this troubling scenario. Even worse, some organizations don’t learn from this experience, creating a cycle much like the movie “Ground Hog Day” with Eddie Murphy. Like Mr. Murphy in the movie, companies unsuccessfully try different ways to fix the problem year-after-year before finding the solution.
What doesn’t help you avoid a TPM solution?
- Let’s just make all trade promotions off-invoice. This approach reduces the deduction surprises, but hurts sales. Unfortunately, companies that do this see their retail performance levels decline, which in turn forces companies to spend at even deeper discount levels to boost sales. Some types of promotions just can’t be offered using off-invoice as the method-of-payment, i.e. Scan-down promotions and events for indirect customers.
- We just need better Excel spreadsheets. Too many companies are using Excel to manage millions, even tens of millions in trade spending. While using Excel is better than paper napkins, Excel alone can’t prevent the surprise deductions. Calculating incurred and net promotional liability requires daily transaction level data by customer, by item, for every invoice line item! It may be possible to manage this for a few top customers for your largest items, but it’s not practical to use Excel to know your true trade promotion liabilities across all customers and brands.
- We just need a larger accrual reserve to cover surprises. On the surface, this approach seem logical. If we get trade surprises every year, let’s just create an accrual to cover them. This approach addresses the symptom but not the root-cause. The second flaw in this approach is the underlying assumption that last year’s trade promotion overspend is a good predictor of this year’s overspend. Sometimes that assumption is close, sometimes it’s far off and the ‘Ground Hog Movie’ cycle continues.
- Let’s just cut way back on trade promotions. When a finance person looks at the millions of dollars spent on trade promotion and all the accounting challenges involved, it’s understandable that the organization may question the value of trade promotions. John Wanamaker’s famous quote 130 years ago applies to trade promotions, “I figure half of my advertising works for me, I just don’t know which half”. If you don't do post-promotion analysis, you don't know which promotions are both effective and efficient. Some trade promotions generate a lot of incremental volume for the brand. Eliminating these promotions will cause sales to decline, which in will turn put pressure back on the organization to use trade promotion to boost sales… just the opposite result of the original strategy.
What does work?
- Get a trade promotion management solution! A TPM solution will give real-time visibility to what bill-backs and rebates are still outstanding. Armed with that information, the finance team can accurately accrue for the anticipated promotional deductions that will hit next year. The sales team will know exactly where they stand on trade funds, preventing the trade funds from being under or over spent. This can be done even when the deductions and short-pays come in months after the promotion. This is the happy ending that everyone wants.
New Year’s CPG Resolution:
Is your organization tired of getting these short-pay ‘gifts’ from the previous fiscal year? If so, it’s time to make a New Year’s Resolution to get a trade promotion management solution!
If you are using NetSuite as your ERP, we invite you to evaluate iTPM. iTPM is a native SuiteApp built-for-NetSuite.
President, CG Squared