How TPM can help you improve accrual spend liability

Key takeaways

• 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. Two common types in the CPG industry are live accruals and spending accruals.

• Accrual miscalculations and errors are a common problem. By avoiding data fragmentation, unmonitored budgeting and manual accounting, manufacturers can mitigate financial risk.

• Good accrual accuracy typically lies between 80% to 95%. Companies in this range typically are using sophisticated Trade Promotion Management software that allows for live, dynamic reporting, whilst companies below these range experience problems such as catch-up charges and cash flow problems.

• ASC 606 is an accounting standard on how manufacturers recognise revenue from customers. To ensure revenue is correctly recognised, finance teams must account for the impact of trade spend by following these rules.

Executive summary

Trade accrual management has a massive influence on a manufacturer’s balance sheet and overall cash flow. As such, accrual management is critical to driving greater profitability. Inaccurate accruals often cause painful catch-up charges, challenging cash flow problems and reduced management and investor confidence. Trade Promotion Management software solves these challenges by providing a single source of truth for sales, finance and RGM teams. An accurate picture is provided of all promotion terms, allowing for the seamless management of funds, accruals and claims in one platform. This method allows for higher accrual accuracy and more funds free to be deployed across promotional activity. 

What are trade spend accruals?

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. Within the consumer goods industry, trade spend accruals are promotional funds a manufacturer must account for on its balance sheet in the month or period that product sales happen, to cover the future costs that will be deducted and claimed by a vendor.

Managing these funds is critical for manufacturers to ensure financial reporting remains accurate, healthy and reflective of their current standing with a given customer. Depending on the agreed upon audit process, these entries can fall under different categories:

Live accrual: The rate per case or percent of revenue that’s earned on everything you sell in the current budget period. This method often creates problems for finance teams in dissecting when a promotion has run versus when the deduction has been submitted. Real-time financial reporting becomes a challenge, and without careful control, can lead to costly miscalculations at year-end.

Prior year accrual: The booking of an accrual number based upon last year’s results. Whilst this option can provide some broad guidance, it fails to capture any incremental products or event activity that a manufacturer has launched in-year. This can lead to an under-accrual, failing to capture new promotional activity, or over-accrual where trade spend is accrued but not deployed to drive additional revenue.  

The two types of accrual budgets: live vs. spending

There are two options when it comes to accrual budgets:

Live accrual: A flat rate per case shipped or a percentage of everything you sell within the current budget period.

Spending accrual: Calculated from an actualised metric from a trade promotion management (TPM) application, based on the agreed upon promotions.

Here’s how the accrual is calculated.

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 purchased 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 $600.

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.

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Estimating accruals for new SKUs or customers with no trade history

Given the volume of new products added to the shelf each year, finance teams can deploy a few options to determine these types of accruals.

A good starting point is to find a product that is closest based on category, price, size and shelf location. Teams can also look at the contract agreement with the vendor and immediately accrue the fees associated with the new SKU within their balance sheet. 

As with any new SKU however, both options are still an estimate. Finance teams should prioritise checking and fixing these accruals within the first few months, rather than waiting until year end. This sound governance ensures trade spend can be efficiently deployed and the opportunity for miscalculations are avoided. 

How to avoid trade accrual miscalculations

Avoid data fragmentation

By building your entire trade marketing plan into a unified Trade Promotion Management solution, it reduces the likelihood of errors, ensuring sales, finance and RGM teams share a single source of truth.

Avoid unmonitored budgets

When budgets and KPIs do not link directly to live data, organisations run the risk of overspends, and increase the risk of miscalculations.

Avoid manual accounting

Calculations made independently of one another, without a centralised system to track updates, should be avoided. Delaying entries also runs the risk of errors occurring at a later date. Booking accruals directly from a TPM system reduces audit risk and avoids month end balance sheet amendments.

When to write off a stale trade accrual 

A stale trade accrual can only be written off when the legal obligation from the vendor has expired, been cancelled, or circumstances have changed based on new agreements. Even still, teams should be diligent before writing off a trade accrual. 

Request a statement and audit to ensure the outstanding balance is not accounted for from their perspective. Review contractual terms as there could be a legal timeline when vendors are obliged to bill you for the accrual. Finally, stay in communication with your internal teams, who may have more information than you on the recent status of a given accrual. 

Accrual differences for broker-managed vs. direct-sold business

Direct-sold business is a model where a manufacturer manages promotions directly with the retailer. Broker-managed business is a model where a manufacturer works with a third-party to manage the retailer relationship. There a few fundamental differences in how accruals work based on each business model:

Data speed

Within the direct-sold model, manufacturers have real-time visibility. Trade spend data comes from your own system, with updated accruals living in your ecosystem. Whereas, with broker-managed, data is delayed since reports are relied upon from the third party.

Accrual costs

Direct-sold accruals cover the promotional discount owed to the retailer only, and are deducted directly from your invoice. With broker-managed accruals, manufacturers must cover the discount plus any associated commissions and administration fees. Adding an additional party can make claims and deductions harder to track, match and clear.

Approvals and control

Sales and finance teams own full approval and control in a direct sold model. Broker-managed models require greater auditing to ensure the promotions implemented match what was agreed with the retailer. 

Multi-entity and multi-currency accrual consolidation 

For global manufacturers, multi-entity and multi-currency accrual consolidation provides a unified view of total trade spend activity by aggregating data across different geographies and currencies. 

Trade promotions are executed at the local level across different business units, branches and brands, but often are reported on by a parent company on a global scale. Likewise, all promotions are managed and negotiated in local currencies, but often reported in the parent company’s currency. 

For instance, a large US manufacturer could be running promotions in EMEA, LATAM and APAC, where each region will have its own processes, agreements, laws and currency rates. 

A robust Trade Promotion Management solution with ERP integration reduces the risk of exchange rate errors, missed local liabilities, and ensures financial compliance under global accounting standards. 

How ASC 606 affects trade spend accrual accounting

ASC 606 is an accounting standard on how manufacturers recognise revenue from customers. The Financial Accounting Standards Board (FASB) recommends a five step approach when determining revenue recognition:

1. Identify the contract with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognise revenue when (or as) the entity satisfies a performance obligation

ASC 606 creates greater trade spend clarity and audit compliance, in turn leading to more investor confidence when making decisions.

We recommend consulting with your own accounting policy team to ensure the appropriate action is followed for your specific trade spend agreements.

Accrual accuracy and audit readiness

Accrual accuracy measures booked trade spend liabilities versus actual costs once deductions are cleared. Audit readiness is the process by which finance teams can prove calculations are legitimate and verifiable to both internal teams (SOX) and external auditors. 

What "good" accrual accuracy looks like

Good accrual accuracy typically lies between 80% to 95%. Companies within this range have sophisticated software with multiple integrations, allowing for dynamic updates and strong forecasting throughout the year. Within these systems, SKU level tracking is available, and come year end, variances are only minor and can be fixed quickly. 

Companies below 80% run into problems such as margin erosion, locked trade spend that cannot be reinvested and significant adjustments at year end to balance the books.  

Boost your trade promotion performance 

TELUS Trade Promotion Management allows manufacturers to execute profitable promotions and control their finances efficiently, with fund, accruals and claims management all built into the product with seamless ERP integration.

Fund management

Maintain better control over your trade spend and help to prevent overspending with P&L, HQ funds management and long-term spend analysis.

Accruals management

Understand the open liability and financial impacts of your programs and promotions.

Claims management

Implement higher levels of claim validation and manage your settlement process within a single, auditable system of record, and leverage our services team to process claims at scale.