Accounting
Taming the Wild West: 3 Steps to a Better Financial Accrual Process
Financial accrual calculations are the Wild West of revenue management, reminiscent of the days when rebates in life sciences were calculated completely in spreadsheets — any mistake can impact your bottom line. Finance teams that are manually calculating accrual rates create the potential for inefficiency and inaccuracy. Errors can manifest themselves in lumpy financial results or greater financial exposure.
Here’s a three-step primer on financial accruals, how they’re being handled, and what you can do to tame the process and reduce your exposure while increasing the efficiency of your finance team.
- Pinpoint where accruals go wrong. Most finance teams calculate financial accruals in Excel spreadsheets that use numerous macros to summarize the data and calculate accrual rates. Because this is a manual process, most companies calculate the data for just their top five brands or product families and then group everything else together. Alternatively, companies might summarize the data for each brand or product family across all wholesalers and customers to come up with a weighted average rate. Because these are simply estimates, the potential grows for overaccrual and underaccrual. Overaccrual results in locking up capital that could be used to fund the business. Underaccrual may leave your company without enough cash to pay the rebates when the rebates are due.
- Dig into why accruals drain efficiency. As I mentioned above, most finance teams calculate accruals by exporting data from a variety of sources, such as their rebating system and sales forecast system, into intricate spreadsheets, which are used to forecast the accrual rates to apply to future sales. From start to finish, the process can take several weeks each month, both to calculate the accrual and to manually record the rates in an ERP system. But the process doesn’t end there. The team must then monitor the actual payments to ensure the difference between the real rebate and the accrual is minimal. Examine your company’s accrual process to see what steps or systems eat up the most time or are most prone to error. Spreadsheets and other manual systems are often red flags.
- Strategize how to get accruals under control. A good start is software that automates the accrual process, preventing the errors that can occur when spreadsheet entry and calculations are handled manually. Because accruals draw on data from a number of sources, however, any software automating the process must also integrate with ERP and other systems. Automation and integration will allow your finance team to focus on analyzing the data and ensure more accurate accruals.
Accruals are just one component of revenue management, affected by the complexity of the rebates and incentives that drive channel partner relationships. But clearly they can have a significant impact on your bottom line as well as the efficiency of your finance team. By understanding the process and solutions that exist for streamlining the calculation and monitoring of accruals, your company can rein in this Wild West to save time and shore up your bottom line.
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