CFOs, ever wonder what happens when your trade promotion accruals don’t add up? (Spoiler: It’s a mess. Cash flow issues, missed forecasts, and everyone pointing fingers at each other.)
Trade promotion accruals matter. Imagine Joe from the accounting department struggles with inaccurate accrual calculations every quarter. He relies on sales team planners to estimate accruals, but errors keep slipping through.
While everything may seem fine now, these miscalculations can snowball into a serious problem, especially when they impact year-end financial statements.
No CFO wants to get an unexpected surprise and explain it to the board.
Can we prevent this from the start? Absolutely. Let’s explore how.
Table of Contents
The Hidden Risks of Trade Promotion Accruals: A CFO’s Wake-Up Call?
Trade promotion accruals are supposed to help businesses match expenses to the right accounting period, ensuring financial accuracy. But in practice, they often become a financial black box, prone to manipulation, estimation errors, and even outright misstatements.
Learn more about trade promotion management problems here.
Over/Under Accrual And Their Consequences
Many companies under-accrue expenses throughout the year, leading to a massive year-end true-up that catches executives off guard and directly impacts the bottom line.
On the other hand, over-accruing might seem like a cautious approach to financial management, but it can result in cash inefficiencies and financial misstatements, some immaterial, others material enough to impact key financial metrics.
How Arbitrary Accrual Methods Create Financial Risk
Without a formal budgeting process, some teams resort to using last year’s actuals plus an arbitrary inflation factor, sometimes 5-10%, or even 20% to “play it safe.” While this approach might seem practical, it quickly unravels when inflation spikes or market conditions shift unpredictably, creating significant discrepancies between expected and actual promotional spend.
The problem gets worse when accruals are booked based solely on financial forecasts rather than actual trade spend data. In some cases, finance teams allocate accruals based on what the forecast dictates rather than consumer behavior trends that should be provided by the sales team. These discrepancies can shake investor confidence and, in extreme cases, expose the company to financial restatements.
CFOs must enforce stronger internal controls, demand data-backed accrual estimates, and ensure trade promotion spending is tracked in real-time. Otherwise, what starts as a “small” accrual adjustment can snowball into a financial nightmare.
Lack of coordination between sales and finance teams
One of the keys to trade promotion management success is aligning your teams to work together effectively. Cross-functional teams (sales, and finance teams (accounting and deductions clearing) often fail not because they’re bad at their jobs, but because they operate in silos.
Sales is focused on mapping out promotions, accounting is busy crunching numbers, and the deductions team is left scrambling to keep up. When communication breaks down and teams aren’t aligned, profits inevitably slip through the cracks.
For TPM success, collaboration is necessary so that every team understands how their work impacts the next and works together seamlessly toward shared goals.
10 Best Practices for Managing Trade Promotion Accruals Effectively
The following are some of the best practices of managing trade promotion accruals:
1. Collaborate Across Teams
In large companies, information is often siloed. Work closely with cross-functional teams (e.g., sales, finance, and controllers) to gather all relevant data for accurate accrual calculations.
2. Understand That Accruals Are Estimates
– Recognize that accruals are based on estimates, not exact numbers. It’s normal for there to be variances between the accrual/estimate and the actuals. Small differences (immaterial variances) are expected and generally not a concern, especially month-to-month (MoM).
3. Focus on Materiality
– Only significant variances that cross quarters or years and exceed audit thresholds should be flagged. Even then, these are usually considered misstatements rather than material errors affecting financial statements.
4. Base Estimates on Facts, Not Desired Outcomes
– Ensure that accrual estimates are supported by factual data and historical trends, not by what someone wants the financial statements to look like. This maintains accuracy and compliance.
5. Ensure Year-End Accuracy
– The most critical point is that the year-end value in the accounts and the profit & loss (P&L) statement must be correct. This ensures financial statements reflect the true financial position.
6. Accrual Adjustments and Rationale
– If changes are made to accrual calculations, document the rationale behind them. For example, if a controller requests a change, ask for supporting information or emphasize on coordination – When there is a need to adjust accruals – the rationale should always include sales buy-in.
7. Communicate with Controllers
– Controllers often have additional information that can impact accrual calculations. Engage with them to understand their reasoning and ensure changes are well-supported.
8. Year End Audit- Audit Trail
– Always be prepared for audits by keeping detailed records of how accruals were calculated, any changes made, and the supporting data. This helps demonstrate that estimates are reasonable and based on factual information.
9. Continuous Improvement
– Regularly review and refine the accrual process to improve accuracy over time. Use historical data and feedback from audits to make adjustments and reduce variances.
Stop the Cycle of Trade Promotion Chaos
Incorrect sales estimates lead to under planned trade spend, massive deductions, and exhausted accruals, leaving management frustrated and finances in disarray.
We help companies maintain healthy, sufficient accruals on their balance sheet, so trade promotions run smoothly, without unexpected financial shocks.
Stay ahead of deductions. Plan smarter. Protect your margins.
Let’s fix your trade promotions today.