The Licensing Industry has “grown up” putting
few and minimal special recordkeeping requirements on Licensees. Licensors
simply expect Licensees to maintain appropriate records to meet the
various internal Management and governmental requirements. With these
records, nearly all royalty reporting requirements will be met. In
fact, it surprises many Licensees who ask, “Can you suggest a
good royalty reporting computer system?” when I answer, “I
probably would not have a computerized royalty reporting system.” Read
further and I think you will see why I say this.
Let's first focus on what we are trying to accomplish. The most
common comment we hear when we leave a Licensee (after completing an
On-Site Contract Compliance Review as discussed in the following chapter)
is: “You really simplified this for us. We now understand what
we are doing and how we can do it easier and better.” A lack
of focus causes wasted time and reporting errors.
For Licensees, a major objective of a good recordkeeping system
is to properly accumulate licensed sales so you can efficiently and
accurately prepare royalty reports.
IN THEORY, Licensees should develop a computerized royalty reporting
system that accumulates the licensed sales, calculates royalties and
prepares final reports in the format Licensors require. IN PRACTICE,
however, for all except the largest companies with a sizable computer
staff, the simpler the better. A computerized royalty reporting system
not only requires programming time and expertise it also involves ongoing
maintenance. Generally, companies that have and use a few basic, “controlled,” reports
will have less problems than companies that try to tailor reports for
each special need – royalty reporting being one of these special
needs.
Accumulating Licensed Sales
Virtually every company (whether in licensing or not) has a report
that accumulates the month's sales by item/style. This is not only
an excellent report for Management, it accomplishes 98+% of the royalty-reporting
task – it accumulates the sales for licensed items/styles. If
you have this report, you now only have to “sort” and total
the sales for reporting. But, before we use this report, let's complete
one, very important, task of verifying its accuracy – probably
the most important step in the entire royalty report preparation process.
The question to ask yourself, at each step in the royalty report
preparation process, is “How do I know the amounts are correct.” The
Total Sales amount of this report should equal your total Company sales
in your General Ledger or Invoice Register. Say,
for example, that your Company's monthly sales are $1,000,000 with
licensed sales being 10% of this total. If you take your licensed sales
from a Sales by Item for the Month type report, you can quickly verify
this report contains all Company sales by verifying the total sales,
on this report, equals $1,000,000. You have another “independent” report
that confirms its accuracy. Besides saving time and money, by using
an existing Company report (rather than creating a special computerized
royalty report), the “Sales by Item for the Month” report
is usually easier to verify than a computerized royalty report.
If, on the other hand, you program a “Royalty Report” to
identify and extract only the licensed sales, and in our example the
total sales on this report equals $80,000, how will you know if the
total is correct? Hopefully there wasn't a computer-programming problem,
someone failed to code an item/style to appear on the computerized
Royalty Report, or that one of several other possible errors occurred.
The difficulty with the computerized Royalty Report is that it is usually
hard to independently verify the amounts on the report – to confidently
say it includes all sales.
To help identify licensed items/styles make sure your Item/Style
Master File and invoice descriptions consistently have a full licensed
property design description. It is important for Licensees to ensure
their systems have adequate audit trails for both internal and external
testing purposes – Item/Style Master and invoice item/style descriptions
are an important part of this.
“Tricks” for Simplifying Sorting of the Sales
Once you have a good report with accurate item/style sales, and
you verify this report includes all sales, the next step is to extract,
sort and accumulate the licensed sales. Most Licensees are licensed
by more than one Licensor and some Licensors require reporting by “property,” meaning
you may have to prepare several royalty reports for a single Licensor.
Let me explain how the Licensees that do the best and most efficient
job of accumulating and reporting licensed sales do it. Again, as surprising
as it might sound, most Licensee's complete this task in a computerized
spreadsheet program like Lotus or Excel.
First, they setup their “template,” listing the licensed
items/styles and other pertinent reporting information like, the item/style
description, etc. Then, they assign a “sort” code, to each
item/style so, after they enter the month's sales, they can sort the
items/styles in the reporting order. Setting up the template (and assigning
the sort codes) is the critical step for efficiency purposes. For example,
let's look at a Pro Sports example. Pro Sports Licensees are normally
licensed for all teams in a League. Let's say a Licensee produces four
different items/styles (3 T-shirts and 1 Sweatshirt) for the 30 teams
in a League – a total of 120 different items/styles. Let's also
assume the League requires this Licensee to report the sales of the
T-shirts on one royalty reporting form with the Sweatshirts reported
on another form – this is common since Licensors, for their own
internal management reporting system purposes, need sales information
in different ways.
In designing the template, the Licensee could use a sort “field” for
the League and a secondary “team” sort field. Then, the
spreadsheet program would sort, and accumulate the sales of, the four
styles by team. But, the Licensee would still have to separate the
Sweatshirt sales, for each team, from the T-shirt sales. The solution
to this is, when you have to submit more than one report to a Licensor
(you must separate the product on different reporting forms) use different
Licensor codes for each reporting form, not each Licensor. In this
example, use one “Licensor” code for T-shirts and another
for Sweatshirts – then the spreadsheet program will accumulate
the three T-shirt items/styles by team and separately list the Sweatshirt
sales by team. Again, setting-up a good template is the key to efficiently
accumulating, sorting and totaling the sales for reporting to Licensors.
Don't forget your “audit” procedures when preparing
the reports. Earlier we discussed confirming the report from which
you take the licensed sales is accurate. You, should also verify the
amounts you enter in the template are right. The easiest way to do
this is to run an adding machine tape of the licensed item/style sales
on the Sales by Item for the Month report. After totaling the spreadsheet
program sales (but before sorting) compare the adding machine tape
sales with the spreadsheet program sales. Assuming the two amounts
agree, you can proceed with sorting the licensed sales and completing
the royalty reporting forms. An easier, and better, alternative (for
Licensees that sell mostly licensed product) is to setup all Company
items/styles on the spreadsheet program – assigning unlicensed
items a non-royalty “royalty” code. Then, after you enter
the item/style amounts, from the Sales by Item for the Month report,
in the spreadsheet program you can verify the total amounts on the
two reports agree. After sorting the sales you simply ignore the non-licensed
items/styles. By “auditing” the amounts you enter in the
template, following either method, you can confidently explain why
you feel all licensed sales are properly reported.
Preparing and Submitting Royalty Reports
The number one rule for preparing and submitting reports is that
they are submitted on time. Customer normally pays an invoice when
a vendor sends them one. Licensing is unique in that the customer (the
Licensee) must prepare the “invoice” (the royalty report)
to notify the Licensor how much they owe. In all other respects, however,
the circumstances are the same – the Licensor is expecting the “invoice” to
be paid by the due date. If you are running late, send the Licensors
a short fax with the date you will have the report(s) to them.
Another important rule is to use each Licensor's standard reporting
form. Most Licensors have many Licensees so it is easier for Licensees
to make the minor adjustments, to adapt to a few Licensors, than for
a Licensor to work with report format changes (even if they are small)
by possibly hundreds of Licensees.
Also, once reports are sent in for a month, the month is closed!
All adjustments should be made in the month they are noted. If you
have adjustments, for a prior month, most Licensors DO NOT want you
to send in adjusted reports (unless it affects a minimum guarantee
payment) – they prefer you enter the adjustments on the current
month's report. Don't forget to go back to the month of error and indicate,
in your records and on your copies of the prior month's royalty reports, “SEE
______ month's report for corrections.”
Whether you type or neatly handwrite the reporting forms, complete
one last “audit.” Using an adding machine, “tape” the
royalty reporting form to make sure you completed it right – make
sure the total agrees with the total licensed sales due the Licensor
that you calculated above. Non-accountants will normally sight check
the completed form, but an accountant realizes you will more easily
and reliably catch all typing and calculation errors through an adding
machine test.
One Last Requirement
Licensees must maintain a monthly report detailing the licensed
sales to the invoice level. For each item/style, the report must list
each invoice and the amount sold. This report is necessary for On-Site
Contract Compliance Reviews (see the following Chapter for a discussion
of these reviews) to permit a review of invoices, in several periods,
and tracing of the noted licensed item sales to the accumulated and
reported sales balances. Without this report it is possible to trace
the item/style numbers to proper reporting, but the actual sales cannot
be verified as reported.
This is another case of a report that is available almost universally
in “canned” Order Entry/Accounts Receivable computer systems.
When we visit Licensees who do not currently print these reports, and
say this is required, they often reply, “Our system does not
offer this report.” But, when they look at the systems' documentation,
or call the software company, they find it is an available option.
If you have two reports (a summary, from which you take the sales dollars
for reporting, and a separate detail to the invoice level report) make
sure you “audit” the totals by verifying (each month) the
summary report totals equal the detail report totals.
That Easy?
To summarize:
- Try to use an existing report to accumulate
your licensed sales – rather than
spending the time and money to develop
a computerized royalty report.
- Verify, each month, (by comparing it
with another report) the accuracy of this
report – don't just assume the sales
amounts are correct.
- Use Excel to complete the “sorting” task – sorting
and totaling the licensed item sales by
royalty reporting form.
- Submit royalty reports on-time or notify
your Licensors.
- Make sure you retain a report detailing
your licensed sales to the invoice level – this
is required for the On-Site Compliance
Reviews.
I hope you have said, “Is that all that is really involved
in Licensee Recordkeeping? It doesn't sound that hard to me.” It's
not. With minor exception, you should be able to complete the necessary
monthly royalty reports using existing computer hardware, software
and reports. Since royalties are usually based on “Net Sales,” the
recordkeeping focus is on your Sales/Accounts Receivables function – no
other area is as important and carefully controlled for most companies.
The satisfying part of our job is visiting Licensees and showing
them how they can maintain records and complete their royalty reports,
more confidently, in a fraction of the time they previously devoted
to this function – I hope this short “visit” helps
you. |
