The procurement role is consistently evolving from a clerical back office function to a strategic business function. Procurement is more than just purchasing goods and services; it has moved to managing and deriving value from the supplier relationship. In rebate management their role involves identifying the right supplier, evaluating supplier performance, and negotiating trading agreements that can provide the highest value at minimum cost. Procurement also has a major influence on the overall costs of the business and cost reduction represents a huge portion of their rebate management strategy.
Enable Blog — Procurement
The complexities involved in managing complex trade agreements and rebate accounting and retrospective discount payments are often difficult to model in manual systems such as spreadsheets and basic accounting software or rely on their suppliers to make the calculations. Organisations opting to calculate, forecast and accrue rebate income in this way leave themselves at risk of inaccuracies, missed opportunities and supplier disputes.
To improve upon your current rebate management system, it’s necessary to take full control of the rebate accounting process and the difficulties that arise from trade agreements in order to:
• remove the risks associated with manual rebate accounting processes
• deliver a streamlined process for handling complex trade agreements
• provide a foundation for growth in business profitability and revenue
1. Spreadsheet replacement
Manual rebate accounting processes, such as calculating rebates in financial spreadsheets, can’t successfully do the job alone in large companies, or in fact even in small companies if they’re managing complex trade agreements with various combinations of rebate arrangements.
Wherever possible it’s advisable to avoid using financial spreadsheets as a stand-alone rebate management system. Not only is a spreadsheet environment limiting in its inability to handle volume-based complex trading agreements, it’s also open to risk.
Calculating retrospective income manually leaves organisations open to error and inaccuracy, which in turn impacts reporting, forecasting, profit margins, cash flow and audit compliance. It’s essential to implementing rebate accounting processes that support what your financial spreadsheets might be missing.
When implementing Enable’s rebate accounting software, many companies choose to set up existing deals first to find out what is missing, and are surprised that despite good controls, and comprehensive financial spreadsheets a substantial amount of rebate income has been missed - around 4% on average.
2. Bridge the gap between purchasing and finance teams
The inconsistencies that surface from managing rebates and retrospective income with financial spreadsheets are often due to miscommunication between purchasing and finance departments. Whilst blame shouldn’t be attributed to either party, after purchasing close a deal, clarification of the intricate details that make up each agreement type is often "lost in translation".
Improved communication and collaboration between finance, procurement and commercial departments is a key accounting process to determining the exact details of each contract. These may have a number of rebate elements such as product-specific incentives, overall growth incentives, margin maintenance, specific promotions, and so on.
Allowing time for contract handover and alignment or installing a program that provides a systemized approach, ensuring that both teams have access to this information will provide greater accuracy of data and rebate calculations plus improve rebate accounting processes.
3. Access for all
Multiple people manage supplier contracts across various teams within organisations - from both the finance and purchasing teams. Implementing a single access point for purchasing teams to input their deal information and ensure internal management sign-off, as well as external supplier sign-off brings numerous benefits. This helps bridge the gap not only between finance and purchasing, but also between your organization and your suppliers.
The transparency that is available when deals can be signed off and sent back electronically improves relations with suppliers, whilst also avoiding any potential for dispute. And by ensuring accurate data is available to negotiate with and that deals can be quickly signed off, your rebate accounting processes are streamlined for ultimate speed, efficiency and accuracy.
4. Integrate with your ERP system
When considering a rebate management system it’s important to look for a package that enhances the rebate accounting processes you already have in place. If your ERP system doesn’t handle all the complexities of your rebate agreements, select a specialist rebate management system that can take data feeds from your ERP systems and deliver a complete solution.
Rebate management systems can significantly improve your rebate accounting processes by providing a fully visible audit trail and ensuring the mistakes that are often made in manual rebate management systems are entirely avoided.
5. Systematize complex trading agreements
Any complex trading agreement for rebate accounting that sits in a filing cabinet — either real or virtual — waiting to be examined at the end of the agreement period is a clear route to failure:
• failure to meet the goals set in the trading agreement
• failure to claim rebates owning
• missed rebate accounting opportunities to sell more and achieve a higher level of rebate
• failure to understand the true current net net price when quoting for new business
The ability to model every aspect of a rebate deal and make it available online is a clear starting point to improving your rebate accounting processes. The rebate management software should be able to model all deal dimensions from the type of rebate deal being made, to the member or branch rules that apply to each of these, the turnover bands they fit into and all the intricacies in between. The complexities remain the same, but the input and management of these rebate accounting processes should be made available to everyone concerned — online, any time.
6. Map transactions from your core purchasing systems to your supplier agreements
Now that you have your trade agreements systematized, the next stage is to integrate all your systems that are involved in buying products under those agreements. Rather than using manual rebate accounting processes such as inputting purchases made, goods received, sales transactions etc against trading agreements, these should be automatically reconciled to the online trading agreement.
In this way, users (finance, rebate accountants, buyers and sales teams) can have access to real-time accurate information about purchases against contracts which in turn is needed to calculate rebate earnings, discount levels achieved, true margins and net net pricing.
7. Automate rebate and pricing calculations
The next step to improving your rebate accounting processes is to automate those calculations that are essential to your profitability and ultimately, business growth.
Calculations needed might be based on purchase data, goods received, sales transactions and/or the data reported by suppliers based on the agreed parameters of each deal ensuring accurate, visible and timely accruals.
Automating the calculation of rebates based on transactions and agreed contracts provides accurate up-to-date data. This can be used:
• by purchasing teams in order to consistently negotiate from a position of strength
• by sales people to understand the accurate margin information when negotiating with customers
• by finance to collect rebate income and report profitability
8. Introduce automated rebate alerts
It's all very well being able to report after the fact, but you can really drive business profitability by automating your rebate accounting processes in the form of alerts for potential missed margins, contract renewals, impending incentive targets and so on.
True cost and margin alerts can be used to warn staff when deals and opportunities could be missed, or need to be chased. Buy price, sell price and true net cost price can be made available and used to prompt these margin alerts. This helps to avoid margin—damaging purchase decisions that can result from the continual variation in margin that happens with very complex rebate deals.
Proactive notifications can be raised when your rebate contracts need to be renewed, when contract sign-off is required, when incentive targets are approaching/likely to be missed, or a change to a contract is pending review.
Make missed rebate accounting opportunities a thing of the past!
9. Provide buyers with the ability to model future deals
To really excel at rebate accounting negotiations, buyers need to have the ability to model deals based on past purchases and future projections. Whilst this is possible by exporting data and using a data warehouse or even a financial spreadsheet, those rebate accounting methods are reliant on building your own models for capturing data and creating forecasts.
A sophisticated rebate management system, on the other hand, already contains all the data that buyers need to improve their rebate accounting processes and should be designed to incorporate the modelling functionality that they desire.
Purchasing departments should be able to replicate former deals and alter their data dimensions to forecast parameters for new contract negotiations, as well as those coming up for renewal.
10. Give suppliers access to your online contracts
With supplier contracts being negotiated and managed by multiple people across several teams within your organisation and within your suppliers’ businesses, a collaborative portal is a highly efficient way to improve your rebate accounting processes. This will make sure everyone has visibility and every agreement has the appropriate approvals in place.
This supplier portal ensures that both you and your supplier share an identical version of the trade agreement, forging a mutually agreed understanding whilst allowing internal management sign off, as well as external sign off by supplier.
A supplier portal puts an end to disputes over rebate accounting claims as all information is clearly visible to all parties.
11. Implement a new rebate accounting solution
The best way to improve your rebate accounting processes? For absolute precision, consider implementing rebate management software that automates both reporting and alert processes to ensure that no opportunities for discounts and rebates are missed. These solutions are specifically designed to meet the needs of organisations with high numbers of supplier agreements containing complex deals elements.
Enable’s rebate management software systemizes the entire rebate accounting process from negotiation to claim and ensures accurate, timely, efficient operation for all trading partners. By storing, processing and analysing every tiny detail about deals, Enable acts as a platform for mutually profitable growth.
If there’s room for improvement in your organization’s current rebate accounting processes, download our guide: How to manage complex rebate contracts effectively for additional information on the solutions available to you.
In business, procurement and finance are two separate departments, working alongside one another within the organisation. The procurement function is about spending the money well and driving more for less from suppliers, and the finance team is all about keeping the balance sheet in check and driving profitability.
Sometimes both parties come out of a negotiating a contract feeling like they have won but if you think you won and the other party (your supplier or your customer) feels they lost, then it’s not really a good situation to be in.
If the customer feels they lost, then maybe they might have stuck with you because they need to in the short term, but in most situations, they could well be looking to take their business elsewhere in the future. On the other side if the supplier feels they were the loser in the contract negotiation, then it’s highly likely the customer will suffer. Suppliers will naturally share innovations, opportunities and ideas with those customers they enjoy working with the most. And, of course, they will be better prepared to win the next round of negotiating a contract.
Both sales and procurement who are involved in negotiating a contract have to be strong characters, but in a globally competitive market it should be “collaboration” rather than “competition” on their minds. We discuss in more detail the 7 key elements you should follow to successfully negotiate a contract.
1. Understand the key objectives of each trading partner
Understanding each other’s business plans at the highest levels is obvious, but nonetheless sometimes overlooked when the focus of negotiating a contract is polarised on reducing the price of a particular category or range. Suppose the customer (a large building materials distributor, as an example) wants to expand into new geographical territories. Negotiating a contract on price, taking account of delivering into those new territories might force the supplier to increase their prices, when the customer is looking for a decrease.
We learned of an instance where the procurement consultant examined the expected product requirements at the furthest locations and determined that the supplier could actually simply deliver into their main depots and the customer themselves would take care of onward shipment to outlying regions. The end result was a reduced price for the customer, lower transport costs for the supplier and better use of the vehicles that had been carrying partial loads between depots and outlying regions. A true win-win. The key to negotiating a contract is to be transparent about business objectives and share data that can help create those win-win decisions.
2. Capture objectives and incentives in a joint business plan
We aren’t just talking about the mechanics (the pricing and incentives) of a B2B deal, but the wider agreed goals for both parties. After all, the incentives are only there to help manoeuvre trading in a direction that meets the business goals. And only by monitoring the success at that high level, can both parties really determine the best course of action in the future.
Keeping an eye on the bigger picture is essential to the success of both parties, but all too often the only elements that are systemised are the details of the contractual agreement. Having all information about a deal in one place helps to maintain focus for future contract negotiations.
3. Share the business plan to every department that can impact performance
All too often we have seen examples where procurement negotiates a contract, but because the commercial team isn’t fully aware of the contractual agreement, they create their own deals for the very same products. Suppose a sales person at a timber merchant is approached by a house builder for a large volume of timber. If they don’t have visibility of the procurement team’s contract negotiations, they may circumvent that and go straight to the timber supplier to get a “one off” agreement to suit their immediate opportunity. What happens next is that the volume of timber purchased by the sales person is not counted towards the target for the deal that was struck by procurement, and the rebate margin is in jeopardy.
Similarly, if those chasing up rebate debt don’t have complete visibility of the contract they have negotiated, they may not be claiming all the rebate that is due. We see this a lot at Enable, and the root cause is often the systems that are being used. If the pricing mechanisms and marketing funds in the contract cannot be 100% replicated in the financial control systems, claims are very likely to be missed. The negotiated contract is stored, but essentially forgotten as the team works on the (partial) information that is available to them via their system.
We have found this to be the case when implementing deal management software. Those who take the time to set up all the previous year’s contractual agreements and review what should have been claimed are — in all cases — very surprised by the amount that has been missed.
4. Get on the same page as your trading partner by using a common format
Working towards mutual goals is not easy when you have separate copies of the contractual agreement, different systems for recording deliveries, and other systems for calculating rebate claims.
Instead, what is needed is a single deal management system that:
• Holds the contractual agreement (in a systemised format as well as the actual electronically signed document);
• Provides a common language and data set for all parties;
• Provides an audit trail for the sign off of the document and all activity beyond;
• Holds transactional data at a granular level;
• Provides easy roll-up summary information by branch / category or other;
• Displays appropriate information for each user (finance, commercial, procurement, suppliers).
By sharing transactional detail and summaries, having a single version of the truth with regards to all contractual agreements, and having access to powerful analysis tools, both parties can avoid disputes over rebate claims and instead invest time in negotiating a contract that benefit them both.
5. Track performance frequently: at least monthly, ideally daily
With so much complexity around managing rebate deals, it is no wonder that performance is reported on only at the point where a new contract negotiation is about to take place. But by then it is too late to do anything ab-out the past. Of course, regular reporting is not easy when the information needed is in disparate systems.
It takes time to collate the information and perhaps not all of it is available at the same time.
Yet most would agree that tracking performance only at the end of negotiating a contract is to be avoided. Making sure that goods received, invoices, rebate claims and other information is fed into a single system in a timely accurate fashion (preferably automatic, rather than manually) is the only way to enable more regular reporting.
6. Communicate with trading partners and continuously adjust course
Rather like plotting a course in a yacht, tracking progress and taking action in accordance with your findings means you are much more likely to reach the end goal. Measure only once, at the end of the contract term or annually is simply reporting actual versus target. Monitoring and continual adjustment is what helps to manage progress against targets.
Those who regularly forecast demand, report progress against actuals and jointly determine what action is needed in order to achieve the targets set out in the contractual agreement are generally the ones who take full advantage of rebate opportunities. Suppliers gain too, because they will have reached their sales and revenue targets.
7. Meet up and re-negotiate contracts regularly to achieve joint goals
Rather than negotiating a contract once a year, being agile enough to renegotiate should conditions change is an advantage. Exchange rate changes, raw material availability, other trading conditions and outside factors can turn a good deal into a not so good one.
Of course, thinking about re-negotiating a contract part way through an agreement can be a timely, costly affair and therefore to be avoided. If, however, all the necessary information is available at your fingertips and both parties can easily see the advantage, that willingness and ability to negotiate a contract more frequently could become a competitive advantage.
In conclusion, it’s fair to say that to achieve these 7 points, a single deal management system capturing all elements from deals, goals, transactions, rebate claims and rebates received is needed. Enable, integrates with your core systems and provides a complete solution from negotiating a contract to claiming for your complex trading agreements.
In order to prepare for major negotiations with suppliers, businesses often have to extract historical data from multiple systems: buying groups need information from their members' systems, newly merged businesses need information from different parts of the group.