TRADE PROMOTION
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Best Practices in Calculating Trade Promotion Accruals
Calculating the accruals of trade promotion spending is a difficult topic for many
manufacturers. The sales and financial departments may have different ideas of
what they are and how to measure them.
By defining terms and following best practices, companies can avoid conflicts and increase profits, said Chris Beehler, finance director for Marcal, a leading maker of paper towels, bath tissue, facial tissue and napkins. “I find trade accruals to be one of the most contentious terms in the finance or sales groups,” he said. Talking clearly about it, “helps to turn on a lot of light bulbs for a lot of people. But depending on the people in the room you are talking to, you have to know who is part of the accrual that you are talking about.”
A good first step is to define accrual accounting. From a Wikipedia entry, accrual is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. Economic events are recognized by matching revenues to expenses at the time in which the transaction occurs rather than when payment is received. This allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition
For example, the following is how Tradeinsight calculates trade accruals:
- Promotional details are recorded in the system
- The accrual is calculated based on timing, volume and rates
- Certain details create a need for special usage rules to get an accurate accrual.
It is critical that the trade promotion tool be aligned with the enterprise resource planning (ERP) system, taking into account:
- Accounting cycle
- Ledger accounts used to record trade and non-trade expenses
- Profit centers
- Life to date accruals vs. fiscal year
- Payment treatments (checks/deductions) and knowing when they are recorded in the trade promotion tool vs. the ledger
- Fully understand what transactions run through the ledger accounts.
The ERP should drive the setup of the trade promotion system, or at minimum how data for trade accrual is formatted when it is pulled from the TPM. This should encompass fund codes for trade, customer hierarchy, and product hierarchy.
Regular maintenance, at least monthly, is essential to assure accurate trade accruals. Promotion details and cleared deductions must be up to date, and promotions, or the details within the promotions, need to be closed properly.
To create and book trade accruals, all the pieces related to accounting for the promotional activity must be captured. Depending on the setup of the ledger, this includes: current month activity; changes to prior period year-to-date activity; changes to prior year; and payment activity. Establish a way to “snapshot” points in time, measure changes and roll them forward.
Set up a month-end process that everyone must follow:
- Establish a format for summarizing the data
- Agee on what data is to be pulled
- Agree on any adjustments or reversals, and document them
- Timing is a critical in terms of when the data should be pulled, and if the timing matches the ledger
- Know and agree on monthly reconciling items
- Establish who will be pulling data and who is responsible for reconciliation to the ledger.
“It is important to establish a month-end process that everybody has to follow,” Beehler said. “You have to identify the key people, and make sure that the people who know and understand it pull the data every month at the same time. You need to have a format for summarizing the data, agree on what data is going to be pulled, and agree on any adjustments or reversals.”
Audit documentation also needs to be established. Auditors care about substantiating the trade accrual at the detail level, so detail for both the P&L and balance sheet sides of the equation should support: total trade expense booked to the P&L; and remaining open accrual (amount due) against the balance sheet payable account at year end. From this detail, be able to identify and calculate any changes after year end to justify the number booked to financials.
Documentation retained at year end should include:
- Amount due detail
- Life-to-date promotion detail
- Spending summary
- Payments in process (requested) detail
- Open check requests not issued
- Open deduction detail
- All spreadsheets used for calculations
- Record of any reserves or adjustments contained within the ledger.
In balancing to the ledger, a process and format must be agreed to, and all reconciling items must be identified with particular attention to treatment of requested/incomplete payments in the trade promotion tool. All reserves held in the ledger must be identified and incorporated, including: reserves for increases to promotions; Reserves for post audits; and reserves for special circumstances like post audits, price protection claims, and fines and fees.
“At its heart, the MEI trade promotion system is a financial system,” Beehler said. “You need to be aware of what your background ERP system is doing and you need to be aware of your accounting cycle.”
This article is based on the presentation, “Accruing Spending: Best Practices with MEI TPM,” at the TPM That Rocks: 2012 MEI User Conference (www.tradeinsight.com). The presenter was Chris Beehler, finance director, Marcal, Elmwood Park, N.J. (www.marcalpaper.com). He is a former executive with MEI.
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SECTION THREE
