What’s the best way to account for missed off-invoice allowances?

Trade promotion mistakes happen.  Despite our best efforts, not all invoices accurately reflect manufacturer charge-backs and other promotional allowances that are offered off-invoice.   When mistakes happen, how should the finance team account for the missed off-invoice allowances?

First some definitions:

Off-invoice, or abbreviated as OI:  These allowances are offered as ‘instant’ discounts to be applied  directly to the sales order and invoice.  Years ago we used to call these ‘breathing’ allowances, because any customer that was alive would qualify for the off-invoice allowance.   The off-invoice method-of-payment is the opposite of bill-back.  Bill-back allowances are claimed some time after the transaction.   Outside the USA off-invoice can be called ‘on-invoice’ allowances.   There are typically three attributes to determine if an order qualifies for an off-invoice discount:

  • Customer:   Does the customer on the claim match the customer on the promotional contract?   Many MCBs, rebates, and other types of trade promotions in the CPG industry are customer specific. If the promotion is not customer specific, then the customer must be a member of a geographic area, trade channel, or other group that qualifies for the allowance.
  • Product:  Is the item in the promotion?  Promotions are usually offered to specific case codes, because you ship specific products, not product groups.  The item must be identified in the promotion to qualify for the allowance.  If the promotion is offered to production groups, then the claimed item must be in the item group.
  • Dates:   Allowances are offered for a specific time.  This is measured using ship dates’, and sometimes also by order dates.   The shipment date (and/or order date) must fall within the start and ending dates of the promotion.

What types of discounts or OI?  For customers that are direct, meaning you directly ship to them, there are some discounts that are given off-invoice.  Examples include EDLP (everyday low price), MCB (manufacturer charge-backs), and TPRs (temporary price reductions).  Performance related discounts like scan-backs are offered as bill-backs.

Missed off-invoice:  We will define this as a customer claim for an off-invoice allowance that was missed on the invoice, and claimed by the customer.  In essence, a missed off-invoice becomes a bill-back, because it will be ‘paid’ after the transaction.

So, when a customer claims a missed off-invoice, how should the finance team process the claim?  As with many aspects of trade promotion management, the answer isn’t straight forward.  To process a missed off-invoice claim, you’ll need to do some research.

Is the missed off-invoice valid?  In other words, do you officially owe the allowance based on the customer, product and dates on the original sales order?

Valid:  If yes, chances are good that you have already accrued for the allowance.   This is an example where your planned off-invoice may not have been applied to the sales order by your ERP.    For example, a customer’s EDI order may not correctly include the off-invoice allowance.

If the OI is valid, you’ve already accrued for the off-invoice allowance, and you don’t need to adjust your accruals to account for the missed off-invoice claim.  Your finance team can simply expense the claim against the existing accrual for off-invoice allowances.   In iTPM, you just EXPENSE the deduction.  No need to match it to the promotion.

Not Valid:  If the claim is not valid, then you have more research to decide how to process the claim.  Examples include:

  • Invalid SKU: The sku on the claim isn’t in the approved promotion.
  • Outside deal window:  The claim is for a shipment before or after the official promotion dates.
  • Invalid customer/location: The claim is from a division of the customer that was not included in the original promotion.
  • Other: The claim is just incorrect.  Wrong rate, a duplicate of a previous claim, etc.

For invalid claims of missed-off-invoice, CPG companies can dispute the claim and request re-payment.   For those claims that are rejected by the retailer and not reclaimed, there are two approaches to resolve the short-pay:

  1. Match the missed OI to the promotion.  This helps with post-promotion analysis, because it documents the true cost of the off-invoice promotion.  Because the claim isn’t valid, chances are you haven’t accrued for this discount.   By matching the claim the promotion, your reporting will highlight the difference between Expected OI Liability and Actual OI Spending.
  2. Or….  Keep the claim identified as disputed, but expense the claim to the appropriate chart-of-account.   Use the historical short-pay data to address the behavior in future customer reviews and negotiations.

Missed Off-invoice is declining because the CPG industry trend has been to reduce off-invoice allowances in favor of bill-backs and performance allowances.   Bill-backs are a better way to enforce retail performance compliance.  If your organization still offers off-invoice allowances to some of your customers, your finance team will occasionally need to process a missed OI claim from the retail customer.


Alex Ring


CG Squared, Inc.