Are you frustrated with overspend “surprises?” Tired with not knowing how much money you’ve accrued and spent? There is a solution.
Non-finance personnel sometimes confuse budget accruals with liability accruals when they begin working in a Trade Promotion Management (TPM) software solution.
Budget, or funding accruals
Trade budgets can be generated in two basic ways, on a fixed budget amount or on an accrual basis.
- A fixed fund is exactly what the name indicates, the salesperson gets a fixed amount of trade to run their business and generate their target number. Often there are more than one.
- An accrual-based budget is simply an amount of spend based on a percentage of sales. The fund Is accrued on an ongoing, or “live” basis and decremented as spending actualized.
Which is better?
- A fixed budget eliminates uncertainty, but is also limiting and could lead to poor decisions. The budget is the budget regardless of where revenue is coming in relative to target. Typically, a sales person would have to “go back to the well” if more money is needed.
- An accrual based budget has the advantage of rewarding for generating higher levels of sales or protecting spend when sales are not coming in at the expected rate. This puts more responsibility and accountability in the hands of sales.
Accrued Spending for financial liability
Accruals from a finance standpoint is about understanding how much and when financial liability needs to be booked – or entered into the general ledger. In our trade promotion management system, CPGvision, we look at spending from three perspectives; planned spend, accrued spend and actual spend
Planned Spend – This is the spend that is generated based on the promotions that have been entered into the system. Each promotion has a projected volume (base and incremental) that will have spend applied to it that is either variable, i.e. based on a per unit or per case rate (off-invoice, bill-back, scan) and/or fixed (lump sum).
(planned volume * variable spend) + fixed spend = total planned spend
Actual Spend – Actual spend is the combination of off-invoice spending plus deductions and check requests.
The problem with actual spend is that there can be a significant lag between when the spend needs to be booked from a liability standpoint and when the spend is actualized. Deductions can lag by weeks, months or even longer
In order to provide the best estimate of how much liability should be booked for a promotion, accrued spend is calculated. Accrued spend is a calculation that utilizes actual volume shipped to calculate the spend that is expected.
(actual volume * variable spend) + fixed spend = accrued spend
Let’s look at a simple example of a Feature promotion:
Projected billback spend
Projected lump sum spend
Projected total spend
Accrued billback spend
Accrued lump sum spend
Accrued total spend
4 key advantages of using the accruals function in CPGvision:
Visibility – everyone that needs to know the liability can see it, almost in real time if invoiced shipments are integrated from ERP to TPM on a daily basis.
Accuracy – Forecasting accruals based on last year’s historical spend doesn’t account for any changes in the promotion plan. Additionally, changes are made to promotion specifics on an ongoing basis throughout the year. Tracking accruals in CPGvision gives you very close estimates based on current sales actuals. Accurate accruals mean few month-end or year-end, surprises - in the form of significant overages or underages, for the finance team.
Hierarchy alignment – because CPGvision holds data at the Account/SKU/Week level, accruals can be rolled up to any level in the product or account hierarchy that is needed for financial reporting.
Productivity – automating the calculating and posting of accruals is a significant productivity savings for the finance team, who can then spend more time analyzing the business.
The best-in-class fully connected and integrated RGM solution suite for the CPG Industry.
Meet CPGvision: the best-in-class, fully connected, and integrated TPM and RGM solution suite for Consumer Packaged Goods, built on the Salesforce platform. With the most advanced functionality in the industry, CPGvision equips you with real-life problem-solving applications for TPM, TPO, and RGM.
Your success is our success- CPGvision proudly provides a dedicated customer success team staffed with CPG industry professionals. Regardless of where you are in your RGM journey, you’ll be fully equipped with the solutions you need for profitable revenue growth. Contact us today to learn more.