This article is relevant if you are seeking to use NetSuite to drive commission tracking and reporting.
Background
When we work with our clients in our NetSuite Systems Integration practice, we are often confronted with the limitations offered by NetSuite’s Incentive Compensation model. The significant limitation of the tool is that the structures have very limited API and customization capacities. In addition, some data structures are not searchable. Understandably, clients want to use NetSuite’s tool, yet I need to emphasize the risk that we may encounter requirements that will be difficult to address. See this article that addresses some of those limitations.
When it comes to royalties and commissions, incentive programs are often invented by sales management seeking to drive specific revenue performance; however, the ongoing maintenance and calculations become the Accounting Department’s responsibility. The default approach is to develop a spreadsheet model to hold all the variables, export period based transaction data, calculate the obligations, and manually record these in NetSuite. This often becomes a sore spot because it takes a fair amount of time to produce this information and it is often error-ridden — not to say that salespeople also want better information sooner.
I have written before about the fundamentals in Commission Accounting Design. See my article, Fundamentals for Driving NetSuite Commissions and Royalties. In this post, I would like to illustrate some record structures that support a good commission design. While I could go into depth about each concept, I am seeking to be brief to help illustrate the mindset to stimulate design patterns as you contemplate your own.
NetSuite Commission Record Structure Concepts
In a good commission record structure, a number of important factors can be considered — all of which must be assessed against specific requirements. The following record pattern helps produce automation and reporting possibilities.
- Transaction Scope: a custom project (grouping) structure can be used to tag transactions to allow for a larger scope beyond the conventional sales order. Thus multiple sales transactions can be tied together to represent more complex customer economics and business narratives.
- Salesperson Tiered Rates: a table of tiered commission rates connected to salespeople help express different performance objectives.
- Planned Start Economics: Non-financial transactions, such as Estimates, Sales Orders, and Purchase Orders offer a planning capacity to express anticipated commissionable sales, costs, margin, and obligations at the beginning of the effort when the customer indicates commitment.
- Planned Current Economics: Assuming there may be delivery challenges, the planning records (e.g, Sales Orders and Purchase Orders) may evolve from the start. Thus, we always want to see our best interpretation of the planned economic performance so we can compare that to our plan start to help us learn about the reliability of our initial assessments.
- Actual Economics: Assuming good accrual practices in the organization (often easier said than done), we can measure the current (earned) economic performance; because it may take many periods for the entire customer delivery to occur, and miscellaneous adjustments may enter into the equation, we can account for the actual financial performance using posting transactions. We can then contrast Actual Economics from our Planned Start and Current performance assessments.
- Actual Cash Economics: Some commission plans are based on cash receipts. Sometimes, there are realization issues for customer payment or other credit considerations. Thus a view that shows the inbound and outbound cash transactions offer an ultimate economic view.
Click on images to see example structures.
NetSuite Commission Record Reporting Concepts
With the above record concepts in play, it is imperative to consider capturing information as performance changes in various accounting periods:
- Period End Economics Snapshot: at the end of each period, the performance is captured in another structured record designed to snapshot a dynamically changing situation. This allows us the ability to report the changes from previous periods and can provide the basis for assessing our obligation (accrued commissions) at that point in time.
- Period End Obligation: with the Economics Snapshot available, we can calculate the obligation due to the salesperson. Other factors such as draws and adjustments can enter the picture. We can account for previous obligations already discharged.
- Final Performance: for customers that have long-running projects, it is sometimes difficult to assess if the project is really closed to confirm the final measurements. Expenses often straggle in late. Thus, the concept of deeming a project closed, either in manual fashion or in an automated manner, allows for a final assessment to be recorded.
With these additional record concepts and supporting structures, rich reporting can be produced. Click on images to see example structures.
Once the practices to record and reporting are strong, it’s straightforward to record obligations automatically using native NetSuite transactional records, such as an expense report or a vendor bill.
Automate Your NetSuite Commissions
When organizations are utilizing a spreadsheet method for commission and royalty accounting, I generally suggest that it is entirely possible to have a database-driven application that can dramatically reduce the amount of time to generate reports and improve information quality; however, there is a readiness aspect to contemplate. These projects demand strong analytical leadership to tease apart challenges and confirm requirements. In addition, projects of this type often reveal other internal practice weaknesses that must be addressed to realize the full potential. Are you really ready to take it on?
As a NetSuite Systems Integrator, my firm is very comfortable with leveraging NetSuite’s provided tools and the platform to build custom structures to produce a solution. Like all the work we do for our clients, we leverage all previous work in the form of algorithms, records, and reports where possible without a license fee. The goal is to solve the overall challenge — not peddle software.
If you found this article meaningful, feel free to sign up to receive notification of new articles as I post them. If you are ready to automate your commission or royalty processing in NetSuite, let’s have a conversation.