Audit-proofing Trade Funding....
By Brian Moore, Global retail consultant and CEO of EMR-NAMNEWS, mailbox@namnews.com

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With the development of Post-Audit-Recovery (PAR), coupled with the growth in trade funding to over 20% of sales to the customer, it is important that vendors anticipate the probability that every record of every promotional initiative will be subjected to analysis in terms of ‘plan vs. actual’, up to six years in arrears....

If a supplier’s system can handle such examination without cost, then perhaps no further action may be required. However, for the remaining 98% of vendors, it may be worth examining some positive aspects of the process.

Essentially, PAR is a post-payment review to identify overpayments to vendors (and under-collections!). It is not an audit in the traditional sense. Rather it is a control activity designed to assure the integrity of the payment/collection process, and as such, it is clearly a management function and responsibility.

For those in any doubt as to the appeal of the process to retailers, bear in mind that although the customer obviously pays for a PAR analysis, usually on a percentage of recovered funds, all monies so recovered go straight to the bottom line… In other words, PAR is here to stay, especially for narrow margin retail businesses…

It follows that in the absence of documentary records, even a relatively weak customer has to be given the benefit of any doubt arising from a PAR audit. Whilst this may represent a major threat to the unprepared supplier, it is important to view PAR as a long-overdue and positive development in helping to regulate trading arrangements between supplier and retailer and provide an effective base for ensuring compliance, especially in trade funding.  

The positive approach to post-audit-recovery

Approached positively, it can also help to build a stronger relationship with trade partners. Incidentally, it is worth bearing in mind that the same post-audit-recovery process can be applied by vendors to manage the financial elements of their purchases of materials and services from further up the supply chain.

By taking the initiative in terms of setting and documenting common standards, attempting to clarify process and ensuring accuracy in implementation of initiatives, the supplier can ensure that the resulting system will be easier to manage and audit, apart from contributing to a better return on investment.

It follows that the NAM/KAM, being closest to negotiated trade funding deals, is in a key  position to help define system parameters and has a direct interest in ensuring compliance at all levels in supplier and retailer organisations.

Such a system, built upon an appropriate level of transparency and trust, will help to avoid disputes in the future, and can result in a seamless integration of trading strategies and an increase in joint profit, fully defensible at any point.

In addition, for both partners, PAR can help to identify opportunities to remove inefficiencies and redundant tasks from a number of cash management processes that cover internal functions and external trading partners.

A further benefit can result from the fact that the introduction of a PAR process can lead to a merging of accounts payable and buying departments, which means that any progress in setting and maintaining PAR standards, can benefit the supplier in terms of on-time payment.

Trade funding budgets now represent too high a proportion of sales to be left exclusively in the hands of the sales department. However, audit-proofing funds expenditure to meet PAR standards can help in retaining a high degree of influence by NAMs/KAMs…

Managing the ‘Receiving End’ of Post-Audit-Recovery

Given the inevitability of increased examination of  trade funding usage in the future, and up to six years in arrears, it can be important for KAMs to ensure that they audit-proof their budgets, by assessing all aspects of the supplier-retailer partnership in order ensure that all payments and collections are fully accurate and defensible.

Areas of influence for KAMs

Whilst Post-Audit-Recovery (PAR) covers all aspects of the supplier-customer relationship, it is perhaps more beneficial for KAMs to focus upon their areas of influence, especially in pricing and trade funding.

Bearing in mind that both parties will benefit from the adoption of common standards, a KAM should aim at understanding process and the KPIs associated with the following:

If a KAM avoids setting, documenting and managing standards in these areas, they will be set on the KAM’s behalf, with inevitable loss of KAM influence in the process. There is too much to be gained through funds recovery for trade funding to be left unmanaged in the future.

Essentially, the KAM needs to address processes, controls and measures. This will result in a reduction in business risk, cut unnecessary costs, and provide a better return on trade investment.

In practice, this means improving visibility of funds in both supplier and customer organisations, by separating fund-types into:

• Pricing: the basis for supply

• Trade fund: investment for performance

Ideally this analysis should be built up over time, by customer, brand and country, on the basis that any fund not having a defensible rationale is vulnerable. Even more so, the manager of the fund… Trade fund management should link brand-plan and customer-plan objectives, within a channel plan context, to trade funds strategy.

In addition this strategy should aim, in part, at helping the customer achieve on supplier scorecard, and retailer KPIs such as Demand forecasting, Promotions management, Ranging, Shrinkage, Availability and Financial resources management. It is worth bearing in mind that the customer can also be measured on customer retention rates, returns, trading up and share of total expenditure.

In essence, Post-Audit-Recovery obviously represents a major opportunity for retailers to enhance net profits, but by taking the initiative and building appropriate checks and balances, a KAM can anticipate the inevitable and gain influence and status in the process.

Alternatively, there is no alternative…

Date article published: 07/04/2006