This article is relevant if you need to determine obligations, commissions, or other amounts due driven by costs recorded using NetSuite vendor bills.
Background
In our NetSuite Systems Integration practice, we frequently work with professionals in a contractor capacity. As experienced in most all organizations, the search for staff quality talent is demanding.
We incentivize our staff to find other good people to join our firm. If a referred individual joins our firm, we offer 10% of the monies earned by the professional for the first year of service. This is similar to a payout to a recruiter who finds qualified salaried employees — the basis of the recruiter’s fee is their annual compensation.
Thus, as we process our obligations to our newly hired contractors, we also need to calculate our related obligations to the staff that referred the professional to our organization.
Leveraging the Prolecto Commission Engine
We leveraged the free-of-license-charge Prolecto Commission/Royalty Engine to solve such a challenge. Please see my 2021 article, Overcome NetSuite Commission and Royalty Challenges, for a full description of this capacity that has solved several challenges for our clients. In that article, I describe some of the limitations of the NetSuite Incentive Compensation Module.
We designed our Commission Engine as a building block to take care of all the various ways our clients offer royalty and commission programs. While we mostly think about commissions being earned on revenue or gross profit/margin, there are numerous situations where commissions are earned on costs. Consider the following situations:
- Media Buys: an advertising agency wants to pay a media planner a portion of the media purchased for their clients’ advertising programs.
- Brokerage Business: several businesses produce rewards based on sourcing goods that will be turned around resold (e.g., trading and brokerage). We have clients that work hard to source scarce inventory (often in commodities) of various qualities. Thus, the individual who found the goods is offered a portion of the value acquired independently from the sale to the ultimate customer.
- Affiliate Programs: Like our firm’s situation, programs are often designed around affiliate efforts. These programs may be driven not by revenue but based on the cost of the transaction.
Thus, anywhere we need to produce an obligation dependent on another obligation (i.e., cost or expense) is an opportunity to consider this pattern.
Obligation Rate Cards
The key to the model is to define rate cards that identify the NetSuite transaction elements that indicate an obligation due. Our model used an item reference plus a reference to the GL. The idea in our case was that a vendor bill points to a service item and the general ledger account to indicate we care about the cost side of the transaction.
The Rate Card defines other factors such as the referred party we are obligated to, the values on the transaction to evaluate, the dependent price in terms of rate type (percentage or flat amount), the program time range in play, and the routing for the accounting treatment.
Click the related image to see the rate card.
Vendor Bill Processing
The idea is that vendor bills are processed like usual; no one needs to have extra tracking on the side, remembering that a referral must be paid. The Commission engine evaluates if the vendor bill qualifies. If so, a custom NetSuite Commission Transaction record is generated using the rate card and the vendor bills as input.
To make the system easy to understand, the related custom Commission Transaction is cross-referenced to the source transaction. Cross-referencing supports better visibility and provides the proper reporting and control capacities. Note, even though we are using a vendor bill to drive this transaction, it is conceivable that we can use any other kind of record that naturally records cost or other expenses to get the output we need.
Click the related images to see the vendor bill and related commission transaction.
Commission Obligation Record
Using NetSuite Custom Transaction capacities, we record the referral obligation calculated against the Vendor Bill. Here, we use a journal-style recording technique to reference every line (most granular form) to help us produce a better audit/explanation while referencing where the values were created. This approach maximizes using the NetSuite database to drive reports and summaries.
Depending on the desired bookkeeping, we can point the liability to accounts payable or an accrual account. The obligation record acts as the basis for a sub-ledger system which then can be used to drive reporting to record and explain period-end accruals.
If you point the credit to the accounts payable account, the obligation record is similar to a vendor bill. You can age and pay out the obligations just like other vendor bills.
Depending on the type of controls desired, segregation of duties style workflows can be designed to ensure obligations are reviewed before they are paid out.
Click the related image to see the Commission Obligation record.
Solve Your NetSuite Commission Obligations
The real challenge with Commission, Royalty and Affiliate/Referral programs is the creativity the business leaders use to produce the outcomes they seek in the operations. Thus, we need the utmost flexibility and openness to model their incentive programs in a manner that allows us to use the NetSuite database and programming logic to solve the challenge.
Of course, I want to thank Boban D., a senior technical analyst on our team, for working with me to model this flow.
The good news is that we have a solid pattern for these situations. See my 2019 article, Fundamentals for Driving NetSuite Commissions and Royalties. Using my Certified Public Accounting background and 30+ years with deep technology expertise and a highly-capable professional team, we have yet to encounter any situation where we could not craft the logic we needed in the NetSuite platform to solve our clients’ incentive compensation, royalty and commission concerns.
If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you are challenged with running your commission programs in the NetSuite platform and are ready to tackle it once and for all, let’s have a conversation.
Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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