How TPM can help you improve accrual spend liability
Table of contents
Kinds of accrual budgets
Accrual surprises
Accrual benefits
Key takeaways for accrual management
The accrual process is the audited methodology to make a credit entry to the general ledger account to which trade marketing costs are expensed. Typically, this is part of the end of the month close process. The entry could be a live accrual or a spending accrual, depending on the agreed audit process. This same process is replicated for the year-end close process.
Kinds of accrual budgets
Accruals are a charge for work that has been done but not yet invoiced, for which a provision is made at the end of a financial period.
Live Accrual: The rate per case or percent of revenue that’s earned on everything you sell in the current budget period.
Spending Accrual: Derived from an actualised metric from a trade promotion management (TPM) application.
Essentially, a CPG manufacturer account manager meets with a retail or foodservice buyer to determine a condition to promote their product. The condition can be pricing or merchandising.
How the accrual is calculated: For instance, an account manager enters a pricing condition in the trade promotion management (TPM) application as a rebate for $1.00 off every case of product direct shipped purchase between January 1 and January 7.
The end user stipulates that the purchaser will receive their rebate when they deduct. The end user inputs an estimated volume of 1,000 cases. The event starts January 1 using the input forecast. The spend liability, or spend accrual, is $1,000 = 1,000 cases x $1.00. A TPM maintains the spend liability metric.
The application is updated with the actual invoiced volume of 1,100 cases, which updates the spend liability, or spend accrual, to $1,100.00.
Further actual expense impacts the spending accrual as partial settlements to the accrual. The purchaser deducts $500 of the $1,100 they are owed for the rebate. The $500 is cleared to the spend liability of the rebate adjusting the liability down to $500.
So essentially the spend liability, or spending accrual, are true expenses which are owed but have not been expensed to the general ledger.
This is the most conservative approach and best practice.
Trade Promotion Management: Bayer’s global success story
Learn more
Accrual surprises
Understanding the overage or underage of accruals is important for the financial success of the company. For UK companies managing global operations, accrual accuracy becomes even more critical as discrepancies can impact consolidated financial reporting. At the close of an organisation’s fiscal year, the controllers group must enter a general ledger entry to cover trade costs for that point and after close.
The expense entry impacts net revenue and contribution reporting.
An underage “surprise” accrual negatively impacts financials as unplanned spending
An overage “surprise” accrual is a benefit to the bottom line, but the overage should have been used to invest and drive volume
Live accrual: Due to high low planning, it’s difficult to align volume to spending because there’s a delay of which spending to volume hits the general ledger.
Surprise: Accruals of current year and prior year spending cannot be discerned.
Prior year accrual: Manufacturers arbitrarily book an accrual number based upon last year's results.
Surprise: This can lead to an underage accrual due to incremental event activity or incremental products to prior year that were not accounted for in the accrual.
Surprise: This can lead to an over accrual in which additional trade dollars are accrued, but not deployed to drive additional revenue.
Accrual benefits
Benefits of a spending accrual from a deployed and tracked trade plan:
The entire trade marketing plan is in one trade promotion management (TPM) application
The TPM application contains budgets and objectives to compare to results
Define the spend liability metric, and book the accrual metric directly from the trade promotion management (TPM) application
Maintain the open spend liability compared to actual results
Key takeaways for accrual management
Understanding accrual management is essential for accurate financial reporting and trade promotion success. The spending accrual method provides the most conservative and accurate approach compared to live accruals or prior year estimates.
Accrual surprises can significantly impact your bottom line. Underage accruals create unplanned expenses while overage accruals represent missed opportunities to invest in volume-driving activities.
Using a trade promotion management (TPM) software for accrual management gives you real-time visibility into spend liability and helps prevent financial surprises at year-end close. For UK companies with global operations, this visibility becomes crucial for managing complex international promotional activities and ensuring consistent financial reporting across all markets.
The key is implementing a system that tracks actual promotional commitments rather than relying on estimates or prior year data. This approach gives you better control over your trade spend and more accurate financial planning.
Boost your trade promotion performance
TELUS Trade Promotion Management software empowers CPG companies to plan, execute, and optimize every promotional campaign with precision.
