What is a supplier rebate agreement?
A supplier rebate agreement is a written promise by a supplier to pay back part of what you spent with them once your purchases reach an agreed level over an agreed period, usually a year. If you run procurement or operations, it is money you have already negotiated, and it is easy to lose. To collect it, you need to know which purchases count, which tier you reached, how the rate applies, and when the claim is due, and then you have to send the claim yourself. A rebate is usually paid as a credit note, a document from the supplier that reduces what you owe, or less often as a check.
What should a rebate agreement say?
It should say enough that you and the supplier would reach the same figure working alone from the same invoices. A term left vague when the deal was signed is the one you end up arguing about, so read for these before you sign, or before the year starts if the agreement is already in force.
- The period: the dates purchases must fall in to count, by invoice date or by delivery date, and whether the year is the calendar year or the agreement’s own.
- What counts: which products, which of your sites, and whether freight, tax and fees are included. Say whether credit notes are subtracted first, so the rebate is on what you kept, not on what was shipped and returned.
- The tiers and rates: each threshold, the rate that goes with it, and whether a threshold is measured in dollars or in units.
- How the rate applies: to all purchases once you cross a threshold, or only to the purchases above it. This one sentence can change the rebate several times over.
- Who calculates and when: whether the supplier sends a statement after the period ends, or you must work out the figure and claim it.
- The claim deadline: how many days after the period you have to claim, and what happens to a rebate nobody claims in time.
- How it is paid: a credit note against future invoices or a payment, and any condition attached, such as paying every invoice on time.
How do you calculate a volume rebate?
You add up the purchases the agreement counts for the period, find the highest tier that total reaches, and apply that tier’s rate the way the agreement says. Start from the supplier’s invoices rather than from a spending report, because a report built from your general ledger may mix in freight, tax or another supplier coded to the same account. Then subtract the credit notes the agreement says to subtract, and keep the list of invoices you used, since it is the evidence behind your claim.
- Gather the period’s invoicesEvery invoice from the supplier dated inside the rebate period.
- Keep what countsTake out freight, tax and anything excluded; subtract credit notes.
- Find the tierCompare the net total with each threshold in the agreement.
- Apply the rateTo all purchases, or only to the part above the threshold.
- Claim in writingSend the figure and the invoice list before the deadline.
What is the difference between a retrospective and an incremental tier?
A retrospective tier, sometimes called an all-units tier, pays the rate of the tier you reach on every dollar you spent in the period, back to the first. An incremental tier pays each rate only on the purchases that fall inside its band, the way a tax bracket works, so crossing a threshold improves the rate only on what comes after it. The two can produce very different figures from the same invoices, as the example below shows, and a supplier that calculates the rebate has no reason to choose the reading that pays you more.
Worked example: a rebate tier at Ashcombe, and the rebate nobody claimed
Ashcombe Industrial Supply is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It is a wholesale distributor of fasteners, abrasives and safety supplies, and it buys abrasives from Midland Abrasives under an agreement with a volume rebate.
The rebate clause covers the calendar year and counts purchases net of credit notes, excluding freight and tax. Below $150,000 there is no rebate. From $150,000, the rate is 2%, and from $250,000 it is 3%. The clause says the rate of the tier reached applies to all purchases in the year, which makes it retrospective. It also says Ashcombe must claim within 60 days of the year end, with a list of the invoices it relied on.
Over the year, Midland’s twelve monthly invoices come to $268,400. Three of them carry freight lines totaling $3,150, and one credit note of $2,480 covers a damaged delivery in March. Net purchases are $268,400, less $3,150, less $2,480, which is $262,770.
Ashcombe crosses $150,000 in August and $250,000 only in December: at the end of November its net purchases stand at $241,900, and December adds $20,870. That puts the year in the top tier, so the rebate is 3% of $262,770, which is $7,883.10.
Had the clause been incremental, the first $150,000 would earn nothing, the next $100,000 would earn 2%, or $2,000, and the last $12,770 would earn 3%, or $383.10, for a total of $2,383.10. The retrospective wording is worth $5,500.00 more on the same invoices, which is why it matters that the clause is clear.
Midland sends no statement, because the agreement puts the claim on Ashcombe. The agreement sits in a folder with whoever negotiated it, accounts payable pays each invoice as it arrives, and nobody is tracking the running total against the tiers. In May someone asks about it, long after the 60 days ran out at the start of March. The $7,883.10 is never claimed. Nothing on any invoice was wrong, and the money was lost to a date nobody watched.
Why do earned rebates go unclaimed?
They go unclaimed because a rebate depends on a running total and a deadline, and neither appears on any single invoice. The person who negotiated the agreement moves on to the next one, and accounts payable checks each invoice on its own, so nobody owns the sum of the year. The procure-to-pay process checks each purchase as it is matched and paid, and no step in it adds the year up. Even large organizations miss this: in a review of purchase cards at two Navy units, the GAO found no procedures to check that the bank’s rebate calculations were correct, and recommended that the Navy routinely calculate and verify them itself. To avoid the same gap, give one person the rebate agreements, put each claim deadline in a shared calendar, and update the running total against the tiers every month, not once the year has ended.
How does finance record a rebate before it is paid?
When the rebate is likely and can be estimated, finance records it as your purchases earn it, rather than when the credit note arrives, which is why the running total matters to them as much as to you. The FASB’s Emerging Issues Task Force set out the treatment in Issue 02-16, which the Codification now carries: a rebate payable only once a customer reaches a set level of purchases reduces the cost of what was bought, spread across the purchases that earn it, as long as reaching that level is probable and the amount can be reasonably estimated. Where it is not, the rebate is recorded when each threshold is reached. So a monthly total against the tiers lets your accountant record the rebate in the right period, and a missed claim becomes a cost the books had already counted as saved.
How does Ressura help with a rebate agreement?
Ressura’s Procure-to-Pay Module does not calculate rebates. It checks the invoices a rebate is calculated from: every unit price against the agreement on the invoice date, every fee against one the agreement allows, the quantity against what you ordered or received, and every line, credit and total added up again, with any duplicate flagged. A purchase total built from invoices that were each right is one you can claim on with confidence. For how that comparison works line by line, see how to check supplier invoices against agreed prices.