Managing MCBs and rebates can be challenging. Why should CPG companies invest extra time and effort to keep track of over and under spends by customer and event?
First, a few definitions:
- MCBs: Manufacturer Charge Backs are one form of a bill-back. Other forms of bill-backs include scan downs, TPR allowances, slotting fees, rebates, co-op, lump-sum fees for displays, and other forms of discounts. The common attribute is how the customer gets these trade promotion funds. These discounts are paid or deducted after the transaction is completed. For direct ship-customers, the transaction is your shipment and/or invoice. For indirect customers, there is no direct ‘transaction’ in your ERP because they purchased your product through a distributor, re-distributor, and/or wholesaler. (Off-invoice is the opposite. Off-invoice is applied directly to the customer’s invoice.)
- Over spend: An over spend can be defined as paying more for a bill-back than what you anticipate. If you anticipate owing $10,000 for a feature ad fee, but the customer ends up deducting $12,000, you’ve over spent your promotion by $2,000.
- Under Spend: An under spend can be defined as paying less for a bill-back than what you anticipate you owe. If you anticipate that you owe $10,000 for a feature ad fee, but the customer ends up deducting only $8,000, you’ve under spent your promotion by $2,000.
- Event-based Accruals: This is when you keep track of unpaid bill-back liability by promotional event. You set aside the un-paid amount to anticipate a customer deduction, and to better represent the true trade promotion expense and profitability before the customer deducts. In the example of the $10,000 ad fee, the event-based accrual will be $10,000 until the customer takes a deduction for the promotional ad fee.
- Period-based Accruals: This is when you anticipate your future bill-back liability based on a historical percent of revenue. You apply that percentage to everything you sell, typically all customers and all products. In the example of the $10,000 ad fee, a period-based accrual would not look at the individual event, but instead anticipate that 5% of all sales should be set-aside for all promotional activity, including this $10,000 ad fee.
- Net Bill-Back Liability: This is the net of what you owe for the bill-back but haven’t paid.
Here’s the short answer to the question: Unless you track over and under spends by event, you have no way to accurately ’true-up” your period-based accruals.
Period-based accruals are a good way to smooth out the financial impact of trade promotions on the brand’s P&L statement. The approach is simple, and it is an accepted accounting practice for CPG companies. However, it is only directly correct if your current bill-back promotional liability is in line with historical bill-backs assumptions. The only way to know if your period-based accruals are too high or low is to know your bill-back liability by promotional event. If you know your net bill-back liability by promotion, you can identify where you are over or under accrued.
Here’s the complication. Every claim, deduction or payment for a promotional bill-back doesn’t reduce your bill-back liability. You can’t just subtract the claims from what you think you owe. In our example where a customer deducts $12,000 for a $10,000 ad fee, the promotional liability is only reduced by $10,000, not $12,000. Stated another way, the $2,000 ‘over payment’ doesn’t reduce what you owe for the scan-down portion of that or any other promotional event with that customer. In other words, the over payment can’t be considered a reduction in your liability. If you just subtract all claims from your net liability, you’ll under state your financial liability by $2,000. While this doesn’t seem like much, this can add to up to a huge accrual miss when you consider how many customers and promotions a typical CPG companies manages each year.
Here’s the good news. Most trade promotion management software solutions keep track of over and under spends by event. This is one of the many benefits of transitioning away from Excel to a TPM solution. Use the TPM solution’s detailed information by promotional event as an additional way to assess your financial accruals. While no TPM solution will perfectly forecast your net liability, all TPM solutions will allow you to more accurately anticipate your un-paid bill-back liability.
CG Squared, Inc.