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.

 

INTRODUCTION 

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 
    1. Spoiled Product 
    2. Unsaleable Items – broken bottles, damaged case, etc. 
  • Charges that – generally – require your approval 
    1. Support costs 
    2. Drop Shipment Support – payments to offset shipping 
    3. Dispositions: product issues requiring a third party 
      1. Transfers between distributors 
      2. Buy-backs: the repurchase of product from the wholesaler.  
    4. Programming – activities that are intended to promote sales and marketing 2.2.1. Samples. Supplier contribution can range from zero to 100%.  
      1. Donations for tastings, events, charities 
      2. Special programs – including holiday sales events 
      3. Sales incentives: e.g. commissions, , drink lists, menu placements
      4. Tasting and sampling events 
      5.  Printing of promotional items 
      6. 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.

 

 

CONCLUSIONS 

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.

 

 

The American Spirits Exchange Ltd. 

We believe that success is measured in terms of our clients’ growth.  We bring a contemporary, best-practice approach to a deeply historical  industry. Our clients don’t just beat their competitors, they change the  rules of the game. 

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