May 24, 2017

3 Financial Figures All Brand Licensors Should Track

In the brand licensing business, revenue is king. Many brand owners consider financial figures in brand licensing as the most critical factors in its entire workflow. Not knowing which ones to track can cost brand owners a lot of money. The principal dangers are missing significant financial milestones, jeopardising retailer partnerships, and losing control over the program’s performance. If licensors ignore the signs of distress coming from the financial side, they risk failing the entire licensing program.

There are many approaches to tracking financials within the scopes of a licensing program. All of them aim to unveil how a brand’s licensed products are performing in the retail shelves. Following is the list of the most important financial figures that should be regularly monitored by every licensor.

Minimum guarantee amounts, instalment schedules, and balance

The amount of minimum guarantee often depends on the sales forecasts. Thereby, licensors can, and should, use them to track the success of their licensees in the market. The minimum guarantee is a retainer fee and the driving force for licensees to actively produce, promote, and sell the licensed products. However, other factors may cause the license holder to fall behind the original plan. If they fail to recoup the agreed minimum guarantee, a professional licensing manager will review their reasons. As as a rule, these tend to be the following:

  • The brand keeps losing customers, its awareness curve is declining, and the marketing team doesn't make any effort to improve the performance of the main intellectual properties.
  • The products that the licensee manufactures are seasonal, and therefore the sell-through rate outside the target season is low.
  • The licensor doesn't refresh the brands often enough. Thus, the brand's fans are unwilling to buy the “same-old” products over and over again.
  • The brand's licensed product range doesn't appear to be in line with its core values and targets an alienated customer base.

These facts prove once again that the success of a licensing program and the earnings of licensing partners equally depend on the efforts of the both. A part of the initial terms established within a licensing collaboration, the minimum guarantee is a subject of advanced planning by brand owners, which also brings up the need for early risk management. The brand's team should keep on the hard work of maintaining equity in parallel to the licensing activities. After all, it's just as important for the licensor to support the brand's progress as it is to regularly monitor the payment of the agreed minimum guarantee by licensees.

Sales reports and the revenue generated by the licensee

Licensees are typically required to send sales or royalty report to licensors for review on a quarterly basis. The reports include sales lines arranged by the product Stock Keeping Unit (SKU) and sold in each territory or retail. It’s important for the accounting personnel to validate sales against the contractual terms and inform the account manager if there are any out-of-term sales. Often this happens because the licensee didn't understand the contract terms or had poor control over sales. Additionally, the licensee could get an erroneous royalty rate due to uncertainties in the licensing agreement.

While it's accountant’s job to correct such mistakes and ensure the alignment with the contract terms, brand owners must thoroughly monitor sales reports from day one to eliminate the possibility of complications in the first place. The revenue lost from calculation errors can be staggering. To ensure that the quality of the reported sales is sufficient, savvy licensors implement audit programs.

The generated revenue, on the contrary, provides account manager with a perfect opportunity to review the brand attraction in retail. Some licensed categories perform well in retail, while others don’t. Licensors should keep their eyes on the new trends in other markets and product categories that are similar to their most successful ones. Thereby, they can spot new opportunities from the market gaps and develop new product categories to support the existing range. Because the business is cyclical, the trend and sales window can be short, which is a matter to consider before leveraging on the discovered trends.

The invoiced and the paid balances

After the account manager validates the sales reports and confirms minimum guarantee fees comes the time to invoice. Now, they should be aware of the payment status licensee and the actual balance. This verification is usually the final step before managers make the final revenue confirmation. Therefore, it's one of the most significant control points in the whole reporting procedure.

Managing the licensing cash flow is challenging for most licensors, as it implies the cumbersome process of invoicing their licensing partners. Licensors should know the brand's ''breach'' terms in case their licensee is late with the payment, whether intentionally or unintentionally. It’s also important to note that the taxation and invoicing procedures vary considerably in different countries. Hence, licensors should be familiar with the practices, laws, and the licensing culture in the licensee market.

There are other financial figures which can severely affect the brand's licensing performance. One instance is payments from sub-agents, if they are a part of the licensing game. The milestones above are the most crucial for the financial team to police to secure the brand from financial losses. If the licensor remains in control of those throughout the lifespan of their licensing program, it’ll stand a high chance to become the brand’s new retail hit.

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