How To Use Rebates Accounting: Procedures, Challenges & Solutions

In today’s fast-paced markets, rebates are used frequently, particularly in retail businesses centred on e-commerce. Rebate accounting requires much knowledge. There is a lot to know about rebate accounting to do it correctly. And to use rebates effectively, you need a good strategy. But here lies the question, what is the rebate? Why does your retail business need it? How to use rebates efficiently and effectively in your retail business? 

In the following sections, we will discuss all those answers. We will break down the different types of rebates, examples, and their challenges. This guide covers both vendor and customer rebates. We will also discuss how Accounting Automation System can help streamline rebate accounting procedures. In addition, if you consider using it, download the pricing scheme here to know its price. 

Table of Contents

What Are Rebates?

The term ‘rebates’ in a retail business refers to a portion of compensation given back to customers after what they paid for products or services. The buyer receives either a set of a dollar amount or a percentage of the total sales price as the rebate. This results in a reduction of the total purchase price. For example, cashback may be offered as a rebate, which may take the form of an instantaneous discount on the total price. Or the offer of free products under certain conditions (the “buy one, get one free” rebate). 

Occasionally, rebates are only available if a certain purchase volume is met. This condition makes sense since the point of a rebate is to get people to buy more. Offering rebates may with two methods; on the part of businesses to their customers directly, or on the part of suppliers to the businesses. 

Rebate Example

Here is a simple example of a rebate: a customer is eligible to receive a rebate if they purchase a certain quantity during the rebate period (a volume incentive rebate). For instance, a customer who shops for more than ten items during a single quarter is eligible for a 5% rebate on their purchase. If it costs $10 per item, customers will be eligible for the rebate after purchasing their eleventh pint. At that point, they will be calculated to spend $9.50 on each unit. When customers are offered rebates, they are more likely to make larger purchases of a more significant number of items. After all, rebates are the method to encourage customers to place larger orders for their products.

Rebate Types

The purpose of offering customers rebates is to encourage them to place larger orders for the products being sold by the company. Rebates are an example of an innovative strategy for increasing sales. The following is a list of rebate types you can try today:

1. Rebate for volume incentive

A volume incentive rebate is the most common rebate. This rebate protects the vendors if they don’t sell as many items as they hoped they would. The only time purchasers are eligible for rebates is after reaching volume-based turnover targets or buying a certain amount of product in a given amount of time.

2. Rebate for value incentive 

When buyers reach value-based turnover targets, they are eligible for value incentive rebates as opposed to volume-based rebates, which are calculated based solely on volume, which is a specific dollar amount that has been reached.

3. Rebate on Product Mix Incentive Payments

A product mix incentive rebate could benefit you as a vendor if you want to increase the variety of products your customers buy from you and do so cost-effectively. The objective would be to convince the client to do business with you rather than one of your competitors. One possibility is to condition the receipt of a rebate for a customer’s purchase of a television on the customer’s purchase of computer equipment from your company.

The Challenges in Calculating Rebates

1. Communication problems

The sales and marketing teams might provide rebate incentives, which would then need to be accounted for by the accounting team. However, if there is a breakdown in communication or a misunderstanding regarding the stipulations of the agreement or the amounts, the accounting team may make extremely expensive mistakes. However, if you have an Accounting Management System, the deal can begin within the system, ensuring that all parties comprehensively comprehend the terms.

2. Managing accruals

Managing accruals tend to risk human errors or making mistakes if you do process such as reporting, analytics, and forecasting manually. You need to accurately track each prior accrual purchase to qualify for rebates based on total volume, value, or accumulated over time. Because levels of a tiered incentive depend on one another, you must accurately track accruals to ensure a timely and accurate rebate. For that reason, using Accounting Software will help you to eliminate errors caused by manual human errors and make it possible for you to scale the accruals management process in an automated way.

3. Errors on the balance sheet

The rebate accounting can harm your company’s balance sheet and raise audit concerns when something goes wrong. This error may have a detrimental effect on the financial stability of your future business practices. If your accounting team keeps track of all rebates manually across multiple spreadsheets, you increase the chances of errors. You cant let that happen. 

Also read: Accounting Software Implementation To Improve Your Business 

How to Use Rebates for Your Retail Customers Efficiently?

After going over the fundamentals of rebates, let’s discuss how customers should account for rebates in a retail business. This matter is where things may become difficult if you account for your rebates manually. But do not fret; there is a solution for Finance Automation Software that can track rebates and accounting processes so that your team does not have to do so manually. Implementing such solutions will improve efficiency, time savings, and fewer errors.

Using rebates for retail customers means the customers will receive a refund of the sales rebate. If the supplier pays the rebate to the customer, the vendor will deduct it from the cost of the goods they sell when they account for the rebate (COGS). For instance, the AB supplier might provide a customer rebate, which Best Buy would list on their website products. The price drop is not from Best Buy but from the manufacturer. This decrease in the wholesale purchase price is relevant to Best Buy because it relates to the company’s cost of goods sold.

Conclusion

Automated Finance Software makes it simple and quick to handle rebate accounting. With rebate automation software, your retail business can manage rebates, boost sales, increase margins, and enhance customer service. Managing the complexity of accounting for the rebates and overomce its challenges is easy now, thanks to the software. The finance software will gather the data from multiple business systems and then process track, and analyze it automatically. You can learn more about how this software can simplify rebate operations and its price by downloading the pricing scheme. Or try the free demo now.