Spend Accrual Management

Trade Spend Accrual Management

I always found managing trade spend accruals boring. However, it’s a critical responsibility. Getting it right means keeping financial statements accurate, staying compliant with accounting principles, and staying on top of profitability. It’s a task that requires precision and attention to detail, and over time, I’ve realized just how integral it is to driving success.

My Understanding of Trade Spend Accruals

Trade spend is a necessary cost we encounter whenever we sell products through a retailer. These expenses range from commissions paid to the retailer for selling our products to shopper marketing campaigns or better shelf visibility for our brands. While the events tied to these costs might happen at various times, the actual payout to the retailer usually occurs later. The only exception is on-invoice discounts, where the cost is recorded at the point of stock purchase by the retailer.

Following the matching principle in accounting, we must make sure to record expenses in the same period as the revenue they help generate. For trade spend that’s linked to volume, this means aligning the cost with the period when the stock is sold to the retailer, not when shoppers buy the products or when the cash payout happens.

Getting the Timing Right

The timing of trade spend accruals can create complexities. Accruals are often recorded before the associated instore event occurs. For example, a promotional campaign might be planned for June, but the associated spend is accrued in May when the stock is sold to the retailer.

Spend Releases

If the actual spend during the event turns out to be lower than the accrual, the excess amount must be “released.” For instance, if you accrued AED 10,000 in May for a promotion but actual EPOS sales during the June campaign resulted in only AED 8,000 of spend, the AED 2,000 difference must be released. This release would be reflected in the July P&L as an increase in net sales.

Overspends

Conversely, if the accrued amount falls short of the actual spend, an “overspend” must be recorded. In the above example, if the actual spend was AED 12,000 instead of AED 10,000, the additional AED 2,000 would appear as a reduction in net sales in the July P&L.

What helps better Accrual Management

1.       Accurate ForecastingLeverage historical data, promotional trends, and retailer insights to forecast trade spend with precision. The better the forecast, the less likely you’ll encounter significant releases or overspends.

2.       Regular MonitoringKeep a close eye on accruals versus actual spends. Regular reconciliations with EPOS data help in identifying discrepancies early and mitigating their impact on the P&L.

3.       Transparent CommunicationWork closely with finance teams and retailers to ensure alignment on accruals. Transparent communication can prevent misunderstandings and foster stronger partnerships.

4.       Document All AgreementsEnsure all trade spend agreements, including promotional mechanics and anticipated uplifts, are documented in detail. This reduces ambiguity when reconciling accruals with actual performance.

5.       Scenario PlanningAccount for variability in shopper behavior and market conditions. Building flexibility into accrual estimates can help absorb minor deviations without causing P&L disruptions.

Conclusion

Trade spend accrual management is a delicate balancing act that requires precision, foresight, and collaboration. For account managers, understanding the principles behind accruals, coupled with proactive monitoring and adjustment, ensures financial integrity and operational excellence. While the task may seem tedious, effective management of trade spend accruals is a hallmark of a proficient account manager, driving not just compliance but also the profitability and sustainability of the business.