Today we are talking about Accruals.
Here’s a crazy scenario for you if you’re a Vendor. One of our brands got hit by Amazon for $128,000 all at once in accruals. Now, this can be avoided and keep reading the article to find out how. Amazon has certain accruals. They break down into the following: damage allowance, freight allowance, Co-Op, and payment terms.
So what does that mean in terms of strategy?
2.5% DAMAGE ALLOWANCE
2.5% FREIGHT ALLOWANCE
12% CO-OP
2% PAYMENT TERMS (NOT ACCURALS) IS TAKEN ON EACH PAYMENT
The majority of the time, it is 2.5% on the damage allowance and 2% on freight allowance depending on whether or not you're in the bulk and head aisle. And the Co-Op is an average of 12% which is pretty standard across the board. That puts you at 16.5% plus another 2% for payment terms, depending on what your terms look like. The terms are either 91 net and you don’t have to pay Amazon for anything, or what we recommend is 61 net and you pay 2%. So the total amount of accruals for our brands is anywhere from 15%-20%.
Here’s the issue. Amazon has a reoccurring accrual basis that bills your account once per month. For example:
If you get $25,000 in POs on a weekly basis, you would have $100,000 at the end of the month. Now Amazon doesn’t take 18% or 18.5% in each individual PO. They will pay out the $100,000 in full but at the end of the month, they’ll take the 18%, so $18,500.
To summarize, if you $100,000 in POs in one month, Amazon will pay it in full on a cynical basis. But then in the last PO of the month, whenever you're paid, Amazon will take out the full accrual, in this case, $18,500. So for the first three weeks of the month, you’ll get $25,00 but in the last week, you’ll get only $7,000.
In the case of our brand that got hit with $128,000 in accruals, Amazon forgot to renew the accruals. This means that the brand signed a contract on January 1st that ran a full year till December 31st didn’t sign another one for the following year. And that brand had a million dollars in POs, so Amazon took the $128,000 in 12% Co-Op fees through an audit. This was back in 2020. We know for a fact that Amazon will conduct another audit in 2022, and they are going to deduct whatever 12% is from the PO of 2021, sometime in 2022. Another way we know we are going to get potentially hit is with another $70,000 from the damage and freight allowance percentages. This is if they catch it.
What we are saying is, please go into your financials right now under the “Payment” tab on Vendor Central, and go accept the terms that say freight allowance, damage allowance, and co-op. Another thing to take into consideration is the discounts that Amazon takes, which are taken regardless because you signed. But it's usually somewhere between 1%-2% to pay off early. This is massive because if you have a company with a way bigger amount of POs, say 12 million, the argument is that if you have 12 million dollars in POs, it its no problem to pay off the 1.2 million dollars in accruals. But the problem is that if you’ve already closed the books for 2020, then it can be a challenge when Amazon charges you towards the end of 2021 for 2020 numbers.
To summarize:
