Why Accurate Cash Application of Trade Spend Is Critical for Emerging CPG Brands

Trade spend is a big line item in any CPG brand's budget, and it can be one of the largest expenses for emerging CPG companies. Mismanaged cash application of trade spend can lead to skewed financial data, making it difficult to analyze profits, handle cash flow, or create accurate financial forecasts. 

I know tools to manage trade spend often focus more on promotion planning and boosting effectiveness, but the nitty gritty matters, too, especially when it's time to review your balance sheet or make choices about capital investments. You also can't get a true picture of trade spend lift if you don't tie deductions to the correct sales invoice.

I walk you through the basics of trade spend cash application below and offer best practices for this accounting task. 

The Basics of Cash Application and Trade Spend

Cash application refers to the process of posting payments from customers to the right invoices and line items. Here are some basic examples:

• Restaurant A pays an invoice for the wine it ordered. You must apply that payment to Restaurant A's account. Otherwise, it looks like the customer still owes money.

• A retailer receives shipments every month on Net 30 terms. According to your agreement, late payments incur a 10% fee. The store receives shipments on February 5 and March 3 and pays the February invoice on March 4. It's important to match the payment to the right account and invoice. Otherwise, you might credit the March 3 invoice and leave the customer with a 10% late fee on the February invoice.

Throw in trade spend management for CPGs, and cash application gets more complex. Trade spend includes promotions and discounts; retailers may deduct those amounts upfront when they pay invoices. If you don't apply trade spend deductions correctly, you leave line items open in your accounts receivable, making it hard to truly understand your accounting KPIs.

Some common mistakes I've seen in trade spend and cash application include:

• Not validating deductions. Verify deductions to ensure they align with your agreements, or you might end up accounting for unauthorized or duplicate deductions. 

• Letting trade-spend-related cash application pile up. Keep up with trade spend to reduce opportunities for error and ensure your financial landscape is always accurate.

• Manual data entry errors. Leverage automation where possible to streamline cash applications and detect potential errors. 

• Not having a standardized process. Create a consistent process and communicate it to your customers. For example, if you already account for trade spend deductions on invoices, make sure they aren't subtracting it again when they make payment. 

The Hidden Costs of Misapplying Trade Spend

Obviously, there's a link between trade spend and profitability. CPG brands sacrifice immediate profit margins for future growth, and those strategies can work well. But if you're misapplying trade spend, you may not have a big-picture understanding of your AR and cash flow, which can negatively impact financial decision-making and put growth at risk.

One of the main risks is a poor understanding of open collections and accounts receivable. If you misapply trade spend deductions, it can look like you have outstanding AR where you don't — or hide AR that's actually outstanding. This can create situations where company decision-makers have a skewed sense of what's owed or future potential cash flow. 

At best, you waste time following up with distributors or others who you think owe money only to eventually discover the error. At worst, company owners or leaders make spending decisions based on incorrect AR forecasts and struggle with cash flow challenges later.

Another common risk is an inflated trade spend accrual liability on your balance sheet. If you don't regularly apply trade spend deductions and offset this account, you may end up with a rather large false liability. 

This is the type of "boring" finance services stuff we do really well at BBG because we're experts in the CPG industry. 

Best Practices for Accurate Cash Application

Accurate cash application for CPG brands starts with a consistent approach. Reconcile trade spend deductions at least weekly so you can catch and address discrepancies before accounts become especially convoluted. This reconciliation should include matching deductions to agreements.

Invest in automated processes where possible to match payments to invoices and account for trade spend and other deductions. Blockchain software, OCR tools, and machine learning algorithms make these processes easier for accounting teams across all industries, so consider whether these solutions are accessible to you as a CPG brand now or in the future.

Develop strong communication and collaboration between sales and accounting teams to reduce friction across the entire process. When sales knows trade spend deductions are applied regularly, account reps are more confident in speaking to customers about their balances. When sales is upfront about trade spend negotiations and agreements, accounting can ensure invoicing procedures align with those discussions. 

Consider working with an accountant with CPG experience to set up processes that support best practices or consult on discussions like how much to spend on trade spend.

Cash Application vs. Trade Spend: Understanding the Differences

While they're related, cash application and trade spend aren't the same. Cash application is matching payments and other credits to invoices. Trade spend refers to certain types of promotional expenses.

Cash application is a ledger process, while trade spend management is a growth marketing strategy. However, accurate reconciliation of ledger deductions related to trade spend ensures you have a better understanding of:

• How your cash may flow in the future and what money you're owed

• How trade spend may be impacting each account and your overall AR

• Profitability that accounts for trade spend and provides a better understanding of critical metrics, like your break-even point

The Role of Accurate Cash Application in Optimizing Cash Flow

How you manage cash has a big impact on your company. Accurate cash application, including trade spend deductions, lets you understand where cash may be coming from. If you know what you're owed and when to expect it — and you can trust those figures — you know what type of working capital you have and when you can reinvest it for growth. 

Optimized cash flow also improves your understanding of your company's actual liquidity. For instance, I've seen brands ignore trade spend reconciliation so long that their trade spend-related balance sheet liabilities get out of hand. They literally throw off the balance with fake liabilities — or it tips the other way, and they have false assets in the form of open AR on the books that's really a promotional discount. 

Improve Profitability and Growth With Accurate Trade Spend Management

Managing trade deductions may be a tedious accounting job, but someone's got to do it. If not, you never have an accurate understanding of your CPG brand's profitability. You also have a skewed cash flow understanding, which can make for poor financial decisions that put growth and your brand's survival at risk.

BBG can provide customized solutions to help emerging CPG brands optimize trade spend and cash application processes. Get in touch today to find out about personalized support.

Author: Eileen Vasko

Eileen Vasko is an accomplished Accounting professional with over 10 years of experience in financial management, cost accounting, and compliance. As a former Controller at Iron Horse Vineyards, she excelled at managing complex financial operations, including inventory cost accounting. As the Accountant Manager Team Lead at BBG, Eileen specializes in building highly efficient accounting processes including accounts payable/receivable, payroll, and tax reporting. Eileen is highly skilled in using advanced accounting platforms and tools to drive efficient processes.