Tips to stay focused and identify your CPG trade spend liability
Flashy reporting and dashboards are an easy way to get caught up in data, predictability and “what-if” scenarios but it’s important to remember that as a CPG manufacturer, you really don’t have complete control over optimization. The good news is that you do have control over RGM (Revenue Growth Management). And the key to success begins with a focus on how to accurately identify your plan-year trade spend liability. With this understanding, you can evolve to trade promotion optimization. CPG manufacturers who have unraveled the trade spend liability mystery have gained the ability to realize a 5% positive impact to their revenue growth in the first year alone.
Uncover the mystery
First, you must understand and make decisions based on the trade spend accrual process. This means defining the accrual process and identifying what the best practice is for booking the accrual entry for end-of-year close. In order to ensure that the accrual entry amount is on the general ledger, it will need to cover trade expense from the prior plan year. This is an expense that has yet to hit the general ledger as an actual expense.
There are 2 industry best practices that define an accrual:
- Live Accrual: A defined trade rate in the TPM application is multiplied by shipping case or selling unit at shelf. This is unrelated to promotional activity.
- Spending Accrual: It’s best to identify the promotional trade spend exposure that is real and has not been reconciled as an actual expense with a TPM application rather than a spreadsheet.
Clarify the gray area
- Scan Point of Sale Promotions: Validation of volume from syndicated data of a scan promotion at the register may take as long as 1-2 months to update. Or, what happens if you don’t have the data to validate?
- Indirect Customer Promotions: There is sometimes an extraneous lag time when the retailer submits a direct or indirect settlement. In addition, the claim data may not be valid or contain the quantity purchased from the wholesaler. How do you know when the accrual is correct?
- Aligning to the Plan Year: You need the ability to align spending to your current plan year and prior year plan as transacted on the general ledger. What if your financial transactions on the general ledger do not discern the plan year and only contain the transaction date?
- Spend Liability is Fluid: This includes spend liability beginning-period balance accrual, period adjustments, and period-added spending. How do you understand the spend liability number if promotions are constantly being created, closed and edited?
Take a deeper dive with this on-demand webinar.
Why lose on the over under?
How do you prevent being under-accrued due to either incremental event activity, unplanned spending, or spending not accounted for in the accrual? Or worse, how do you prevent being over-accrued? What if you have accrued an excessive amount that could have been used to drive volume? Both have a direct impact to RGM.
Understanding your accrual process accuracy level and whether it is good enough or knowing that you need to drive RGM is critical. Determination of your accrual process accuracy allows you to solidify your trade accounting close process in the most effective way to meet your particular needs.
Let’s do an exercise called “Rate my Accuracy” for year-end accrual.
✓ Good rating: within ± 10% of Accrual vs. Actuals
✓ Better rating: within ± 5% of Accrual vs. Actuals
✓ Best rating: within ± 1% of Accrual vs. Actuals
If your rating is “good” – is that good enough for you? Let’s compare a 9% difference in accuracy against your trade budget. For example, 9% (of a $100M trade budget) x $100M = $9M. This is $9M that could have been used to drive more sales.
Achieve the accuracy you require, get greater visibility across your organization, create an empowered sales team, improve forecast accuracy and become more aligned with your retail partners by unraveling the mystery when you identify your plan-year trade spend liability. For more on this topic, see the Optimization section of this consumer products industry journey.