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About Zyme
Zyme is the leading provider of channel data solutions for global technology companies. Zyme
processes and validates millions of POS and inventory transactions each week from channel
partners in 180 countries. Zyme supports customers with verified channel sales and inventory
data for mission-critical business processes like revenue recognition, SOX compliance, incentive
payments, sales commissioning, and supply chain planning. With its unique Service-On-Software
offering, Zyme has earned an unparalleled reputation for value in the industry. Zyme provides
seamless integration of channel data with CRM and ERP systems such as Salesforce.com,
SAP and Oracle. As a recognition of its leadership, Zyme was announced a winner in the 2009
Informatica Innovation Awards, and was recognized as a 2010 Computerworld Honors Program
Laureate. For more information call 1-877-262-8993 or visit www.zyme.com.
This document contains proprietary information of Zyme Solutions, Inc., based on the experience and research of Zyme and its
partners, and may not be reproduced without prior consent from Zyme Solutions, Inc. While every attempt has been made to
ensure that the information in this document is accurate and complete, some typographical errors or technical inaccuracies
may exist. The information contained in this document is subject to change without notice. Zyme does not accept responsibility
for any kind of loss resulting from the use of information contained in this document. Further, Zyme is not, by means of this
document, rendering business, financial, investment, or other professional accounting advice or services. Before making any
decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Table of Contents
1 Executive Summary....................................................................................... 3
2 How Channel Data is Used in Financial Reporting....................................... 3
4 Conclusion....................................................................................................10
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
Executive Summary
The channel now accounts for 66% of overall technology sales, according to an Accenture
analysis based on Gartner data1. Because so much revenue flows through channels, and
because Sarbanes-Oxley (SOX) has increased the industrys scrutiny of financial data,
obtaining reliable channel partner data has become a critical component of creating accurate
financial statements. At the same time, unreliable data is a potential SOX control weakness.
Technology vendors use channel partner data to:
Calculate revenue sold through indirect channels
Generate analyses that validate their revenue recognition decisions and accounting estimates
Better manage the indirect channel by assessing current data against historical trends
and ratios
Determine sales compensation
Calculate partner incentives to be paid
This paper discusses the role of channel partner data in financial reporting. It outlines several
data validation and analysis methods that vendors can use to ensure the reliability, accuracy,
and auditability of their financial statements and improve channel management.
On a first-in, first-out (FIFO) basis, which assumes that the units sold into the channel first
were also sold out of the channel first. To account for price protection or other special
pricing situations, the applicable price for revenue recognition purposes is the price listed
on the date of sell-through. Exceptions must be made when the listed price is greater
than the sell in invoice price, when the sold-through goods are no longer eligible for
recent price protections, etc. Because of the complexity of the rules for pricing transactions, it is especially critical for audit purposes for companies to have a reliable, consistent process, as well as clean and accurate channel data to work with.
On a serial number basis, in which the serial numbers of point of sale (POS) units or the
units remaining in inventory are tied to their respective sell-in invoices, thereby using the
exact sell-in price of the unit for accounting.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
As the flip side of the revenue calculation, the FIFO or serial-number methods are also applied
to channel inventory to generate an inventory aging report, which details the number of units
held in inventory for given time frames and the current value of those units. The inventory
aging report can be used to adjust allowances for returns and warranty claims, as well as to
evaluate the overall health of the channel.
SKU
SKU-A
Distributor A
$200
SKU-B
$0
SKU-C
$23
2 to 4
Weeks
4 to 8
Weeks
8 to 12
Weeks
More
than 12
Weeks
Total
$100
$100
$0
$0
$500
$0
$0
$500
$400
$500
$1,400
$0
$10
$0
$0
$0
$33
$123
$200
$110
$600
$400
$500
$1,933
SKU-A
$0
$100
$20
$100
$0
$0
$220
SKU-B
$0
$0
$0
$0
$600
$0
$600
SKU-C
$50
$30
$10
$0
$0
$0
$90
Sub total
Total
1 to
Weeks
$100
Sub total
Distributor B
1 Week
or less
$50
$130
$30
$100
$600
$0
$910
$175
$330
$140
$700
$1,100
$500
$2,843
Figure 1: Report of Liability for Price Protection Claims; by SKU, Distributor, and Age of Inventory Units
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
Partner
Dist A
Dist B
Total
SKU
12Month
Return
Rate
SKU-A
3.00%
SKU-B
3.60%
SKU-C
2.9%
Sub total
3.13%
6Month
POS
Return
3Month
Sell
Through
3Month
POS
Return
1Month
Sell
through
1Month
POS
Return
$29,212
$993
$15,005
$465
$4,567
$146
$29,034
$1,161
$11,892
$571
$3,412
$191
$53,312
$1,493
$27,098
$867
$10,966
$329
$6,910
$111,558
$3,647
$53,995
$1,903
$18,945
$666
12Month
POS
Return
3Month
Return
Rate
1Month
Return
Rate
12Month
SellThrough
3.4%
3.10%
3.20%
$57,828
$1,735
4.00%
4.80%
5.60%
$65,122
$2,344
2.8%
3.20%
3.00%
$97,612
$2,831
3.27%
3.52%
3.52%
$220,562
6Month
Return
Rate
6Month
SellThrough
SKU-A
3.20%
2.90%
3.10%
3.10%
$23,123
$740
$11,560
$335
$5,991
$186
$1,808
$56
SKU-B
3.45%
3.98%
4.40%
5.10%
$62,422
$2,154
$31,211
$1,242
$13,122
$577
$4,800
$245
SKU-C
2.88%
2.88%
3.00%
2.87%
$10,999
$317
$5,989
$172
$3,400
$102
$900
$26
Sub total
3.33%
3.59%
3.84%
4.35%
$96,544
$3,210
$48,760
$1,750
$22,513
$865
$7,508
$327
3.19%
3.37%
3.62%
3.75%
$317,106
$10,120
$160,318
$5,397
$76,508
$2,768
$26,453
$ 993
Figure 2: Returns as a Percent of Sell-Through (Rates Exceeding Currently Established Reserve Levels are Flagged)
Figure 3: Overall Return Rate and Return Rate by Distributor for Given Time Periods
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
When, for a period of several weeks, there are high levels of inventory for a product
whose sales are generally slowing, this serves as another leading indicator that higherthan-normal returns can be expected. The example report below highlights a case where
abnormally high inventory is present for products that are not selling well (i.e., aged
inventory). This report, in conjunction with the one that analyzes return rates, would
help the decision-maker zero in on cases where the return allowances might need to be
adjusted from normal levels. Such reports could prove useful in cases such as a new
product launch where its market acceptance is different from that of similar products. For
example, there are currently 14 weeks of inventory of SKU-B at Distributor A, and 64% of
that inventory is older than 8 weeks. Distributor B is also reporting a buildup of SKU-B.
inventory over 8 weeks. This is a flag to look more closely at the return reserves for SKU-B.
Partner
Dist A
SKU
1
Week
or
Less
1 to 2
Weeks
2 to 4
Weeks
4 to 8
Weeks
8 to 12
Weeks
Over
12
Weeks
Total
Unsold
Inventory
(Units)
Total
Unsold
Inventory
($)
Inventory
Older
Than
8 Weeks
Weeks of
Inventory
SKU-A
$1,000
$2,000
$1,000
$1,000
$0
$0
125
$5,000
0%
SKU-B
$0
$0
$0
$5,000
$4,000
$5,000
700
$14,000
64%
14
SKU-C
$225
$0
$100
$0
$0
$0
13
$325
0%
0.7
Sub total
Dist B
$1,225
$2,000
$1,100
$6,000
$4,000
$5,000
838
$19,325
47%
7.7
SKU-A
$0
$1,000
$200
$1,000
$0
$0
55
$2,200
0%
SKU-B
$0
$0
$0
$0
$6,000
$0
300
$6,000
100%
SKU-C
$500
$300
$100
$0
$0
$0
36
$900
0%
Sub total
$500
$1,300
$300
$1,000
$6,000
$0
391
$9,100
66%
4.9
$1,725
$3,300
$1,400
$7,000
$10,000
$5,000
1,229
$28,425
53%
6.5
Total
Accurate channel partner data is a critical input for reliable financial statements. However,
most companies have little ability to assess the data from their partnersthey must accept
it on the honor system. To ensure that the data is complete and accurate enough to
be used for financial reporting, there are several levels of validation and analysis that are
considered best practices.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
Sales in, sales out (SISO) reconciliation is a good first step to take in establishing the
reliability and accuracy of the data used in financial statements. Additional analyses serve
to highlight and resolve such business issues, as well as to improve the accuracy of certain
accounting allowances. For example, to determine whether reported channel partner
inventory levels are reasonable and accurate, finance personnel can analyze the trend of
weeks of inventory on hand to see whether it is increasing. If the inventory is increasing,
finance personnel might use an inventory aging report to compare its data against trends
in the SISO ratio and observe historical seasonality. Over an extended period of time, sales
into the channel and sales out should match closely; however, inventory may increase
seasonally, as it does prior to the U.S. holiday season. A report that shows the ratio of
sell-in to sell-out over a rolling period of between 4 and 8 weeks can highlight cases
where sell-in and sell-out are not aligned. The aging report can provide important insights
about whether the inventory is aged or has built up recently, in order to support expected
future spikes in demand. A more detailed discussion of some useful channel management
analysis tools follows.
3.1
SISO Reconciliation
The SISO reconciliation approach can serve as an internal SOX control (Section 404)
that can give a manufacturer confidence in distributor-reported data. In this method, the
sell-through and inventory data provided by the channel partner is compared to the sell-in
data to see whether variances between them fall within reasonable limits that could be
explained by causes such as transit time. The method relies on making an estimate of the
inventory (i.e., calculated inventory) based on the previous weeks calculated inventory,
SISO data, etc. The calculated inventory for SISO reconciliation is computed as follows:
Calculated inventory =
Previous weeks calculated inventory
+ Sell-in
+ Transfers from other partners
Transfers to other partners
Sell-through
+ Returns to partner
RMAs (returns to the company)
Adjustments (scrap, theft, etc.)
The difference between calculated inventory and partner-reported inventory is the
variance, or delta. The sign of the delta can be positive or negativevariance in either
direction is equally relevantso the absolute value of the delta for each SKU and channel
partner is considered. Variances are expressed as a fraction of the partner-reported
inventory. An acceptable variance depends on a number of factors, including product type,
volume of sales for the product, and region. The primary output of SISO reconciliation is a
report, such as the one below, that gives a quick snapshot of which partners have reliable
data and which do not. The first four partners on the list have a delta equaling or exceeding
a predefined limit of 20%, while the next three are approaching the limit.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
Abs
Delta
($)
Net
Delta
(Units)
MR
Rpt Inv
($)
Shipments
($)
Abs Delta
(Units)
Net Delta
($)
1,522,452
6,103,880
(1,499,362)
Gomee
1,142,993
1,199,583
(1,027,411)
(283,002)
2,857,109
Kago Electronics
3,557,869
4,771,169
(242,524)
(1,281,372)
14,792,307
Ingra USA
1,363,817
2,057,873
325,817
447,771
6,794,734
726,254
1,255,981
(425,525)
(722,703)
1,292,027
4,487,947
(1,208,770)
(4,329,908)
Partner
Arlow USA
Digita China
Futuro Europe
BCI Camera
(5,978,770)
3,335,233
End
Calc Inv
($)
Abs %
Delta
($)
1,499,362
64,954,341
3,884,520
40%
201,477,790
15,034,832
24%
181,578,399
6,468,917
20%
3,813,553
73,188,378
4,239,077
19%
7,274,943
88,769,815
8,483,713
18%
16%
299,229
1,046,747
(144,499)
(782,838)
1,875,064
31,137,020
2,019,564
Intcomix
1,046,137
3,560,762
568,138
1,842,213
7,302,110
76,808,770
6,733,972
14%
Soga Computers
5,363,695
22,508,005
(722,785)
5,230,947
46,284,456
497,356,692
47,007,240
12%
Futuro AsiaPac
1,004,887
7,310,095
989,740
7,106,040
8,910,507
69,179,734
7,920,767
11%
Alabella
612,285
1,670,309
(420,119)
(1,084,744)
6,531,493
94,721,739
6,951,613
9%
Officeworkers
5,379,998
22,927,356
1,930,000
3,646,953
60,758,752
789,228,521
58,828,752
9%
Ingra Canada
1,463,143
5,212,184
204,483
(129,185)
17,979,541
207,628,324
17,775,057
8%
690,694
2,582,110
(502,731)
(1,987,277)
10,736,050
172,847,900
11,238,781
6%
Havnet Europe
Best Buyers USA
Total
1,057,344
5,564,791
(880,108)
(5,324,152)
18,349,209
134,595,238
19,229,318
6%
30,790,751
105,843,998
(2,516,631)
425,816
253,164,030
3,021,900,338
255,680,661
12%
Figure 6: SISO Reconciliation Report Highlighting Partners with an Unacceptable Delta Between Reported and
Calculated Inventory
The trend of the deltas is also of interest. If the calculated inventory diverges continuously
(i.e., week after week in either direction) from the reported inventory, this is a cause for
concern and should be investigated. The calculated and reported inventories are not
expected to match in most weeks, but a close convergence between the two is expected.
SISO reconciliation can highlight several types of issues:
Inaccurate POS and inventory data
Errors or inadequacies in the internal process for aggregating and validating channel
partner data
Operational issues, such as the failure to capture data from certain SKUs or warehouses
Underlying market dynamics, such as a buildup of channel inventory due to changing
demand patterns
Once an issue has been flagged due to a SISO reconciliation variance, additional
validations can be performed to identify the root cause of the variance and make
adjustments by:
Working with channel partners to improve the quality and timeliness of their data through
partner reporting requirements and compliance scorecards
Identifying and resolving errors in the aggregation and validation of data
Resolving basic operational issues, such as the failure to capture data from certain warehouses or SKUs
Identifying inventory buildups or shortages, inaccurate claims payments, etc.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
3.3
In the absence of upcoming product promotions, sudden spikes in the quantity of sellin inventory could be a cause for concern. An analysis of the weekly sell-in quantity in
conjunction with the weeks of inventory on hand could highlight instances of unnecessary
sales into the channel.
In general, over an extended period of time, the sell-in and sell-out quantities should match
closely. A report showing the ratio of sell-in to sell-out over a rolling period between 4 and
13 weeks would help highlight cases where the sell-in is not aligned to the sell-out.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
Conclusion
Developing Indirect Channels: A Structured Approach to Reaching New Customers and Growing Revenues.
Channel Data Validations for Accurate Financial Reporting and SOX Compliance |
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