How much commissions to pay your partners? Learn the math and logic behind it. Read here →

What is Shadow Accounting and Why You Should Put a Stop to It

What is Shadow Accounting and Why You Should Put a Stop to It

What is Shadow Accounting and Why You Should Put a Stop to It

Executive Summary: Sales reps use shadow accounting mainly to keep track of their earnings if they feel that the official records do not accurately reflect their contributions. Additionally, shadow accounting helps sales reps identify areas where they can improve their performance and increase their commissions. This blog post will look at what shadow accounting is, why reps use it, its drawbacks, and how to avoid it.

Shadow accounting can be a major cause of concern for employers.

Sales reps use this method to maintain their own record of earnings. While this can be helpful for reps, it can create confusion, mistrust, and conflicts if the records don’t match.

Moreover, shadow accounting also leads to a significant waste of the rep's time and effort.

According to this research, 64.8% of sales reps spend time on non-revenue-generating activities.

This blog post will explore everything you need to know about shadow accounting, why reps use it, the risks involved, and how organizations can mitigate it.

What is Shadow Accounting?

Shadow accounting refers to the age-old practice of sales representatives keeping their own record of sales activities and commissions earned, in addition to the official records maintained by their employer.

Sales reps maintain these records in spreadsheets, notebooks, or other methods outside of the company's official tracking system.

Why do sales reps maintain separate records?

They may engage in shadow accounting of their commissions for various reasons, including:

1. Verification of commission calculations

Even today, many companies still use spreadsheets to maintain their commission data. And according to this research, a staggering 88% of Excel spreadsheets have mistakes in them on average.

Sales representatives may use shadow accounting to independently verify the accuracy of the commission calculations that your finance or accounting department is providing.

This allows them to compare the calculated commissions with their own calculations to ensure they are compensated correctly.

Learn how to calculate sales commissions in 9 easy steps.

2. Lack of trust

According to this survey, 65% of sales managers claim their biggest challenge is the need for more time and resources to perform their job. This can be the reality if your sales reps engage in shadow accounting.

Shadow accounting can occur when sales reps do not trust the company's official accounting system. They may want to keep their records to ensure that the company pays them accurately and fairly.

This lack of trust can stem from various issues, such as past payment disputes or a belief that the company's accounting system is flawed.

3. Lack of transparency

Sales reps may feel that the company's accounting system lacks transparency. They may not understand how their commissions are being calculated or how the accounting system works.

By keeping their own records, they can have a better understanding of their earnings and how they’re being calculated.

4. Commission forecasting

Maintaining separate records can allow sales to

  • Estimate future earnings.
  • Track their progress toward financial goals.
  • Assess the financial impact of different sales scenarios or strategies.

Additionally, sales reps can use their personal knowledge, historical data, and market insights to tweak their sales strategies and adjust their personal goals.

5 Major Drawbacks of Shadow Accounting

Do you think your sales reps are keeping track of their sales activities (such as leads, opportunities, and closed deals) separately?

Are they using their record-keeping methods alongside the company's formal sales tracking system?

More often than not, a sales manager's intuition is right.

While shadow accounting can provide sales reps with a greater sense of control and ownership over their sales process, there are several drawbacks to this approach. Here’s a quick look at them:

1. Consumes valuable time

As mentioned earlier, shadow accounting can be time-consuming for sales reps, as they must maintain two separate systems for tracking their sales activities.

This can take away valuable time that could be spent on actual sales activities, leading to decreased productivity. It can also lead to duplicated efforts, as multiple employees may be tracking similar information in different ways.

On the other hand, the finance or accounting department may need to invest additional resources to reconcile the alternative records with the official accounting system, leading to inefficiencies and increased workload.

2. Lack of consistency and standardization

Shadow accounting may introduce inconsistencies in how sales data is tracked, recorded, and analyzed within the organization.

This lack of consistency and standardization can make comparing sales performance across teams or territories challenging, hindering effective evaluation, forecasting, benchmarking, and resource allocation.

3. Creates rifts and disputes

If shadow accounting is not reconciled with the organization's official financial records, it can create discrepancies and inconsistencies, leading to disputes or even legal issues. This can be especially problematic if the organization is audited or faces other regulatory scrutiny.

In addition, shadow accounting can also create a lack of transparency, as sales reps may not be inclined to share their personal tracking methods with their colleagues or superiors. This can make it difficult for sales managers to have a comprehensive view of sales activities and to identify any issues that need to be addressed.

4. Leads to data loss

Shadow accounting can also create rifts between employees or departments, as different groups may have conflicting information or interpretations of the organization's financials. This can eventually lead to a breakdown in communication and collaboration, hindering the organization's ability to achieve its goals.

Plus, if a sales rep leaves the company, their personal sales tracking data may be lost, making it difficult for the company to accurately assess their sales performance and analyze their sales activities.

5. Compliance and regulatory risks

Shadow accounting may raise compliance and regulatory risks if it deviates from the established accounting standards, reporting requirements, or tax regulations.

Non-compliance can result in legal issues, financial penalties, reputational damage, or audit complications. That’s why It’s crucial for organizations to ensure that all sales activities and commission calculations are properly recorded and compliant with applicable laws and regulations.

How to Avoid Shadow Accounting

While shadow accounting may seem like a good idea in theory, the potential drawbacks outweigh the benefits.

To address these problems, you should establish clear guidelines and protocols for sales tracking to ensure accuracy and consistency across the board. You can also encourage open communication and provide adequate training.

However, there’s still a lot of manual work involved.

So, if you want to reduce discrepancies, errors, and potential fraud, use a sales commission management tool.

ElevateHQ is a commission automation tool suitable for small to medium-sized businesses. It offers features like an intuitive plan designer, real-time commission overview, approval workflows, audit logs, and a lot more.

Book your free demo with ElevateHQ today!

Here's how automating the accounting process can benefit your organization (and, more importantly, your sales representatives):

  1. Ensures all financial transactions are recorded accurately and in real-time.
  2. Reduces the risk of errors and discrepancies, making it easier to detect any irregularities.
  3. Boosts transparency and accountability by creating an audit trail that shows who accessed and modified financial records.
  4. Reduces the demand for manual data entry and paperwork, which can be time-consuming and error-prone.
  5. Frees up the salesforce to focus on more value-added tasks, such as analyzing financial data and making strategic decisions.

The takeaway?

Automating the accounting process can help organizations avoid shadow accounting and promote transparency, accuracy, and efficiency in their financial operations – a win-win for all.

Final Thoughts

If you sense that your employees are engaging in shadow accounting or are dissatisfied with their job, automating your sales commission process might be a good idea.

This will allow all commission calculations to be accurately recorded in a centralized system – reducing the likelihood of employees resorting to shadow accounting and boosting their morale.

Additionally, the software will help improve financial transparency, reduce the risk of financial fraud and errors, and increase overall efficiency, making it a worthwhile investment.

Make payouts right every time with ElevateHQ

Move from manual to automated and error-free commission calculations with our platform.

schedule demo banner image