Simplifying Royalty Contract Management with Automation: A Guide for Business Decision Makers

Managing royalties can be a complex process, but Dynamics 365 (D365) makes it more streamlined with its built-in Royalty Agreement functionality. In this blog, we’ll unpack what a royalty agreement entails, walk you through the step-by-step configuration process in D365, and explore the outcomes of the system’s out-of-the-box features. Let’s jump in and simplify royalty management together!

What is Royalty Contract Management?

Managing royalty contracts can often feel like navigating a maze — complex terms, varying conditions, and countless details to track. For businesses relying on third-party assets or intellectual property, handling royalty agreements efficiently is crucial to ensuring compliance, improving cash flow, and reducing administrative errors.

If you're a sales manager, accounting manager, or A/P (Accounts Payable) manager, you're likely familiar with the challenges of negotiating, recording, and processing royalty agreements. But what if there was a way to streamline this process, reduce errors, and ensure timely payments — all while keeping cash flow forecasts on track?

At its core, royalty contract management is the process of overseeing agreements where companies have the right to use a third party's assets or intellectual property (IP). Whether it’s licensing a brand, a patented technology, or copyrighted content, royalty agreements are critical to businesses in industries such as publishing, entertainment, and manufacturing.

The goal of royalty contract management is to automate the administrative tasks involved in recording, tracking, and processing royalty payments. By doing so, companies can improve accuracy, reduce manual labor, and avoid costly mistakes that could harm relationships with licensors or disrupt cash flow.

Understanding Royalty Contracts

A royalty contract is essentially a formal record of the agreement between a business (licensee) and the owner of an asset or intellectual property (licensor). The contract specifies the conditions under which the licensee agrees to pay royalties to the licensor in exchange for the right to use their intellectual property or assets to generate revenue.

Key elements of a royalty contract typically include:

• Negotiated Fee Rates: These define the percentage or amount the licensee agrees to pay the licensor based on sales or usage.
• Territory and Duration: The contract will specify where the licensee can operate and for how long the terms are valid.
• Performance Milestones: Some contracts may include clauses tied to specific sales targets or milestones, which could affect royalty payments.

Based on the detailed explanation above, we will first set up the Accounts Payable parameter for royalty.

1-Accounts Payable Parameter:

• To do this, Go to Accounts Payable> Setups > Accounts Payable parameter.

• Under the broker and royalty tab, select the royalty fast tab
• From the drop-down, select the starting day of the week, Accrual journal, Accrual account, Expense Account, and Procurement Category

2- Create Royalty Agreement:

• The next step is to create a royalty agreement for the calculation. Navigate to Accounts Payable > Broker and Royalties > Royalty Agreement.

• Here on the overview tab, click on the new to create a new royalty agreement..
• Select the vendor account, Enter the description of the Agreement, Unit type, Unit of measure royalty option, Calculation date type, and Start and End Dates.

• The Unit of measure royalty option has 2 options i.e. Convert and Exact, the difference between these is to decide whether to convert the sales order unit to a royalty unit, If the conversions are required, then select Convert if the agreement and sales order quantity needs to be matched then selects Exact Match.
• On the calculate date type drop-down, select when the royalty calculation should take place, if calculation needs to be done at creating a Sales order, select Created. If calculation needs to be done at the when receipt is done, select Requested Receipt, if calculation needs to be done at the time of shipment, select Requested Ship.
• On the General Tab, the "Cumulate sales by" field defines the period for calculating the royalty amount based on cumulative sales. For instance, the period could be set to a month. Alternatively, if you wish to calculate the royalty amount each time a sales order line is invoiced, select "Invoice."
• How the line breaks should be calculated: If royalty is calculated based on quantity or amount, select Calculate By either from Amount or Quantity.
• If the "Approval required" option is enabled, the royalty program owner must approve the claims before they can be converted into an invoice for payment to the licensor.
• If the price for royalty calculation needs to be considered either gross or net, select that from the price taken from the drop-down.

• On the selection tab, Add the products and the details related to them on which this royalty agreement will be working.

• Then on the royalty amount tab, Enter the from value – to value and based on the tier what royalty value is being agreed upon.

• Once this is done, click on the validation from the action pane to make the agreement applicable.

3-Execution on Sales Order

• Now, navigate to the Sales Order under the sale and marketing module.

• Create a new SO with the item details specified in the royalty agreement or open the already created SO with that specified information.
• Select the line and click on Sales order line > Under View > Price Details.

• Here on the royalty fast tab, we can see the royalty amount based on the active royalty agreement.

• As per our setups, royalty claims can be processed on vendors when the sales order is invoiced.
• The selected sales order is already invoiced so we can run the royalty claim. To do this, navigate to Accounts Payable> Brokers and Royalty > Royalty Claims.

• Here, the royalty transactions will appear in the calculated status. If the calculation is fine, then we can proceed with the approval.

• Once the claim is approved, we can proceed with the financial transaction creation. To do this, click on the process button.

• We can see that the royalty transaction has been created and is ready for the post and transfer of the financial values to the respective accounts.

Conclusion

The Royalty Agreement functionality in Dynamics 365 streamlines the otherwise complex process of royalty management. From defining agreements to configuring them and automating calculations, D365 offers a comprehensive, out-of-the-box solution to help businesses save time, ensure accuracy, and maintain compliance. By leveraging this feature, organizations can efficiently handle royalty payments, foster better relationships with stakeholders, and focus on strategic growth

Feel free to share your thoughts or questions in the comments below!

Regards

Ammad Jawed

D365 Finance Functional Consultant

Email # [email protected]