A Guide to Distributor Bill Backs
White Paper Series No. 2015-1
A Guide to Distributor Bill Backs
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Copyright 2015. All rights reserved.
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The following provides an overview of “bill backs”: the practice of wholesalers invoicing suppliers for various costs associated with the sales and marketing of alcohol beverages. It is intended for suppliers of all levels in order to familiarize them with the types of charges wholesalers bill to suppliers, how these charges are managed and the consequences of inattentive management of these charges.
Bill backs are one of the most misunderstood aspects of the alcohol beverage industry by suppliers. In part, this is because the term “bill back” refers to the wholesaler’s process of invoicing a supplier for a charge, which can range from free goods, to returns to marketing expenses. What suppliers often overlook is how these charges affect their internal cash flow and their relationship with the wholesaler.
Cash flow is the life-blood of any venture. Wholesaler payment terms are generally 30 to 90 days. Bill-backs are nearly always due on receipt. As a result the monies-in and –out do not line up: your payment to the distributor is due now while their payment to you is due later. The more a supplier sells the bigger this gap in available cash grows.
A natural response to this cash-flow issue is to wait until the wholesaler pays their invoice before you pay your bill back. Taken to the extreme this would be having the bill-back expense deducted from the wholesaler’s payment what the industry terms auto-deductions. This is where things start to get complicated.
Wholesalers, when run properly and efficiently, are managed more like a bank than a distributor. Handling bill-backs is a perfect example. The cash offset between the bill-back and their payment for the product is carefully
managed. This difference in timing allows the distributor to offset some of their costs using the supplier’s money. So, from the wholesaler’s perspective auto deductions are equivalent to providing the supplier with a line of credit. It is not something they are inclined to do for free (i.e. without a penalty).
Here is where the timely payment of bill-backs starts to impact your relationship with a wholesaler. Wholesalers have a rating system for suppliers, similar to a credit score. This is a combination of many things but a large component is how the client manages their bill-backs. Fail to pay your bill-backs in a timely manner and it will negatively impact your rating. Let your bill-backs go so long that they are auto-deducted from your checks and you will start to see smaller, less frequent orders.
Therefore, carefully managing your bill-backs is a key component of growing your sales and your relationship with wholesalers.
COMMON TYPES OF BILL BACKS
The first part of managing your bill backs is to get a better idea of what they are. Some things are unavoidable, but the majority of the expenses are a result of “programming.” Programs are the sales incentives and marketing efforts that a supplier agrees to with their wholesaler. Sitting at your first meeting, a $5/case incentive may sound good and feel like you are merely discounting your case price. But as these bills start coming in and your check is 60+ days out, you will feel differently unless you have prepared.
By organizing the categories of bill-backs we hope to do two things. First, to provide a glossary of terms you will encounter. Second, to help you understand the categories and expectations so that you are informed during negotiations.
- Charges which are unavoidable
- Spoiled Product
- Unsaleable Items – broken bottles, damaged case, etc.
- Charges that – generally – require your approval
- Support costs
- Drop Shipment Support – payments to offset shipping
- Dispositions: product issues requiring a third party
- Transfers between distributors
- Buy-backs: the repurchase of product from the wholesaler.
- Programming – activities that are intended to promote sales and marketing 2.2.1. Samples. Supplier contribution can range from zero to 100%.
- Donations for tastings, events, charities
- Special programs – including holiday sales events
- Sales incentives: e.g. commissions, , drink lists, menu placements
- Tasting and sampling events
- Printing of promotional items
- Retailer incentives and/or adjustments
REVIEW YOUR INVOICES AND CONFIRM YOUR AGREEMENTS
Here are the steps for managing your bill-backs – and your relationship – with your wholesaler.
Step 1: Be clear about where the wholesaler is going to send your bill back (via email or your office address) AND what programs require your prior authorization, including who in your company has the authority to approve the expense. Both of these are common issues. Wholesalers may have an old address in their system and the next thing you know they stop ordering and you find out that you are 90 days past due on your bill-backs. Who is authorized to approve an expense that is billed back to you is also very important, particularly the larger your organization gets. If you have sales people or brokers, clarify if they are authorized to pull samples or set programming that gets billed back to you. You should have a written policy within your company and clear communication with your distributor in writing.
Step 2: Obtain back-up documentation for any charge from your wholesaler. Specifically, you want proof of the charge. For example, if it is a menu placement, then you should receive a photocopy of the menu. You get the idea. Also, you should double-check everything against the inventory that the wholesaler has in their possession. Most large wholesalers provide you with access to this information through one or more the following: depletion reports (either via summary reports or on-line access) and copies of the support documents (i.e. menus, email authorizations etc.) when they send you the invoice.
Step 3: Verify everything that comes your way. First, check that the charge is actually for your brands (you do this by looking at the back-up documents). It is common for other brands to be included on the same bill so make sure
you are only getting charged for your brands. Second, verify the legitimacy of the charge, especially for programming. Is this the deal that you agreed to? If so, were you responsible for the full amount or only part of the payment (i.e. sharing 50% cost for samples)? But the part you should be most careful about is the timing. Was this program evergreen (no beginning or end dates) or was it for a specific period of time? If the program is to be for a limited period of time, then be clear about the start and end dates. Is it new orders during that period, old orders not yet shipped, or orders that have not yet been invoiced or paid?
Step 4: Set up a regular call with your wholesaler. As your volume grows and your bill-backs become more frequent, more expensive and more complicated,
schedule a regular call with your wholesalers accounting department to review. They are there to help.
For most suppliers, marketing programs and sales incentives are a strategic priority in their growth. Managed properly they align the interest of their sales team and distributors with their growth goals. Managed poorly and they will quickly undermine a company’s finances.
Bill-backs link these incentives between suppliers and wholesalers. For suppliers, proper management means ensuring that they are only being charged for the programs they agreed to AND promptly paying the invoice. The later, if not managed, will negatively impact the supplier’s standing with the wholesaler leading to smaller, less frequent orders.
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