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Integration: The Key to Simplified Accrual Rate Calculations

The financial accrual calculation process stymies manufacturers of all shapes and sizes. Let's look at why it's so difficult to calculate accruals, how an organization can smooth out the process, and what types of return it should expect.

I've spoken with customers in the pharmaceutical, consumer goods, electronics, and even beverage manufacturing industries. Each administers its own blend of rebates and promotions, but they all struggle to calculate accruals for forecasted payments efficiently and accurately.

Challenges in accrual calculation
It doesn't matter if people are using Access databases or Excel spreadsheets to perform accrual calculations. The first step — and most common pain point — is compiling all the data needed in one location to start the process. This data should include, not only past transactions, but also the current membership hierarchy, product hierarchy, sales forecasts, and the structure of the rebate or promotion terms. No matter the calculation system, corralling the necessary data remains cumbersome for many.

Few systems on the market can solve the difficult issue of data compilation. Some interfaces can pull in hierarchy data and sales histories, but they often lack visibility into the complex structures of contracts, such as rebate terms, conditions, and price protections, all of which need to be tracked. Some organizations employ out-of-the-box, add-on automated solutions to calculate financial accrual rates, yet these systems lack direct access to membership and product hierarchy information, and they are disconnected from the latest contract structure.

Benefits of an integrated solution
Add-on financial accrual solutions are a step in the right direction, but deploying a single information hub to house disparate data offers advantages over add-on applications, including efficient processing and a lower total cost of ownership. A single data source eliminates the need to build, test, and maintain interfaces — a compounding cost that companies shouldn't overlook.

For instance, if an organization houses its rebate system outside its financial accrual solution, any rebate system upgrade will also an update to its pre-built interfaces to remain in line with the data model upgrade. Automatically calculating financial accruals in the same system that calculates rebates and promotions eliminates the need to maintain separate interfaces, because they're all built into the solution.

An integrated accrual calculation solution with access to an organization's master data information, current contract structure, and historical information boosts accuracy. The solution always analyzes the most recent information — the same information used to calculate the rebate payments.

Accrual calculation is a necessary encumbrance for many companies, and several solutions can improve the process. But in turning to an add-on solution, organizations might not be getting the most out of their investment. They're likely compromising on efficiency, accuracy, and total cost of ownership. Integrated solutions offer numerous benefits for speeding the process and eliminating potential errors.

Let's discuss best-practices and common headaches around the accrual process. Leave a comment with your questions and feedback below.

6 comments on “Integration: The Key to Simplified Accrual Rate Calculations

  1. FLYINGSCOT
    December 4, 2013

    For the uninitiated maybe you could give a micro tutorial on why accruals are necessary and how they are commonly done in practise.

  2. Daniel
    December 4, 2013

    “Accrual calculation is a necessary encumbrance for many companies, and several solutions can improve the process. But in turning to an add-on solution, organizations might not be getting the most out of their investment.”

    Jon, according to you what are the reasons for that? Obliviously there may be many reasons like staff pattern, wages, business etc; but all can be got corrected.

  3. Daniel
    December 4, 2013

    “Accrual calculation is a necessary encumbrance for many companies, and several solutions can improve the process. But in turning to an add-on solution, organizations might not be getting the most out of their investment.”

    Jon, according to you what are the reasons for that? Obliviously there may be many reasons like staff pattern, wages, business etc; but all can be got corrected.

  4. Jon Brier
    December 9, 2013

    Jacob  – As I mentioned in the article, add-on financial accrual systems compromise on efficiency, accuracy, and total cost of ownership. The most streamlined and cost effective method is to calculate accruals in the same system as the rebates and incentive themselves.  Layering an add-on application drives additional costs:

    • Total cost of ownership: You'd need to build interfaces to import historical rebate data as well as forecast data.  You'd also need to build interfaces to bring in the latest membership and product hierarchy data.  Since this data is already housed in a rebating system, you will need to maintain the interfaces as you upgrade your rebating the rebating system over time.  This is a cost that manufacturers may not account for in their decision.
    • Accuracy: Rebating systems store the incentive structures that financial accrual systems are trying to mimic.  By separating these solutions, you run the risk that what you accrue for does not match the current terms and conditions defined on the contract.  For industries where prices change frequently, it is critical to ensure that your accrual calculation always reflects the latest contract terms in effect.
  5. Jon Brier
    December 9, 2013

    Thanks for the question Flyingscot.  I failed to provide a link to a post I had previously done that I called Financial Accruals 101.  Here is the link.  http://blog.revitasinc.com/2013/02/financial-accrual-calculations-101.html

  6. Daniel
    December 10, 2013

    “As I mentioned in the article, add-on financial accrual systems compromise on efficiency, accuracy, and total cost of ownership. The most streamlined and cost effective method is to calculate accruals in the same system as the rebates and incentive themselves. “

    Jon, thanks for the clarification. How this becomes cost effective?

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