How Do You Record Manufacturer Rebates?

Finding a level playing field when analyzing financial statements is critical to providing accurate results. One of the key pieces to your financial puzzle is a detailed margin analysis of your unit sales. It makes sense that you must be comparing apples to apples for these results to have any value. It also follows that manufacturer rebate programs can put a real wrench in the analysis if not recorded correctly. Read more.

Most manufacturer sales programs provide a variety of different rebate programs. I am sure you have asked the question - why can't they just lower the wholesale price? But that would defeat the purpose. No doubt you provide a number of different incentives to your customers such as retail discounts, free giveaways, special financing terms and so on. The manufacturers are no different – they want you to buy as many units as possible so they build in incentives.

These rebate programs can be very complex and require your full attention when planning your unit purchases for the season. They can take the form of consumer retail rebates, volume rebates, model rebates and price protection rebates to name a few. If not recorded properly in your accounting system, they can have a dramatic effect on your unit margin analysis and overall gross profit margin calculations.

Why does this have any significance to the way you manage your business? We have talked extensively about the value financial information brings to the management of your business. If that information is incorrect or not comparable to the industry, it can do more harm than help.

I have found through the analysis of a number of dealer financial statements, that sometimes rebates are lumped into one account and classified as other income on the Profit & Loss Statement. From an accounting perspective this is not wrong, but it does not allow for the accurate calculation of unit margins. In many cases units are retailed just over cost with the knowledge that your rebates will balance out your margins to a desired target level. For example, let's say you qualify for a 7% volume rebate on your current model ATV's. If your target margin is 11%, you would be selling your units at a 4% margin. If you do not calculate your volume rebate into the sale value of the unit, you would be reporting a 4% margin.

The end result is that you may be setting your profit goals for the next season based on inaccurate sales margins. If the industry average is 13% margin on ATV sales and you are calculating 4% for your unit sales, then you would be relying on wrong information to make decisions.

My opinion is that the best way to account for rebates is to set them up as a receivable. This could be done at the time of each unit sale, or in advance for rebates that are paid in lump sum at the end of the season. This not only allows you to credit each unit sale with the value of the attached rebate, but also acts as a check and balance for the receipt of rebates from the manufacturer. You would be amazed at how many rebates go unclaimed, which is money straight off your bottom line.

In summary, the following are the steps I would recommend for the management of your manufacturer rebates:

  1. When you receive your sales programs make up a matrix of the rebates you can earn so it is clear and concise for booking your units and claiming your rebates. Some manufacturers will provide you with a chart.
  2. Analyze what the industry standards are for each product margin and consider your marketplace before establishing your pricing.
  3. Set up a receivable as you earn each unit rebate. This will be a check and balance for the receipt of your rebates from the manufacturer and allow for the accurate recording of the proper sale value of each unit.

Basing your business decisions on accurate information is the key to good management. Your goal is to maximize the margins you earn on each unit sale, which means you must know what you have done in the past and what the industry standards are for each product group. Believing you are only earning a 4% margin when in reality you are earning 11% with your rebates factored in, can lead to all kinds of bad decisions.

I have a saying that "if you believe you can't achieve a better margin, you won't". If you are currently earning 11% with rebates, why not try 12%. You are taking all the risk so you should be earning a reasonable return on your unit sales.

If you want to compare your margins or need help with recording your rebates, contact me for a free consultation.

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