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Pro rated billing

Andrea Clarke's Profile

When billing our clients for software subscriptions some customers will add additional users to there existing 12 month contract through out the year. The sales rep on the account will issue a pro rated quote, we will not invoice until the customer has signed and sent back the quote. Sometimes they do not sign for days after the 'start date' on the quote. In the past we have kept that start date as is and invoiced for example 5 days later keeping the balance on the invoice the same as the quote.

I do not agree with this and have suggested that customers must only be billed from the day they have access to the new users. I am getting some push back from sales and i want to stand my ground on this as i feel customers should not have to pay for more than they receive but i would like someone to claify what i believe is correct and that i do have a valid point.

Any advice is greatly appreciated

Thanks.

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I am not sure I have full information...but I will give it a shot. In these situations I try to look at what is the industry practice. Also consider your value proposition, brand promise. I suspect Sales is concerned with the commission component. It may make sense to calculate Sales commission from the start. But for the customer, charge based on access. The risk should be low as you are garnering additional business from current customers. This recommendation works for low priced products, but if your product is priced higher, you are accepting a cash flow impact, which may not work.
Hope that helps.

(Agent, JKS Solutions, Inc.) |

Good question, here are a few things to keep in mind...

I noticed your level of experience is as a bookkeeper. There are SAAS revenue recognition standards that the controller of the company is familiar with. If there is no controller then you should ask the owner for permission to speak with their outside CPA and see what their advice is regarding tax recognition for revenue if they are not preparing GAAP financial statements.

The next level will be for you to pull the customer contract and find out what the legal definition is for delivery of the product and customer payment terms.

I think you might be splitting hairs on this issue. There is always tension between the sales people and accounting. The sales people construct a deal that works for the customer relationship but it doesn't always work as well for accounting.

If the amounts are not material within that 5 day grace period between adding the seat license and beginning to use it, then I would not worry about it. If the license is right-to-use then you need to recognize the revenue on the date the customer could use the software. You cannot lag revenue based on when they decide to access the system. If they buy additional licenses in March for a term of March to Feb of the following year, but they don't start adding users in the system until June, they still have paid for the right to use. It makes no difference when they access the system. As Regis mentioned, we don't have enough details.

The main issue for you is going to be whether you are spending too much time to perfect the numbers based on worry about a day or two.

Establish a consistent policy that works consistently for the sales function, because they are the front line and need to communicate what to expect to the customer.

When I buy software sometimes there is a lag due to technical difficulty or some other reason, as long as you are getting the revenue into the right month and year you are fine.

I don't hear you asking about large amounts, so really the process you develop will be to cut down your workload and establish an expectation for the sales group.

If you are working in a small company, call a meeting and explain your workload and ask them if they would be okay to establish a process that can work for all of you.

After that obtain the SAAS accounting standard you should be aware of from the outside CPA so you can determine if you have a GAAP issue for financial statements or not.

Anonymous
(VP - FInancial Planning and Analysis) |

I agree with you 100%. This is like the cable company saying you need to pay from the day you called and requested service versus the day they actually came and installed it.

Andrea Clarke
Title: Bookkeeper - Trainee Accountant ACCA
Company: Private
(Bookkeeper - Trainee Accountant ACCA, Private) |

Thank you all for your input and advice. I appreciate you taking time out of your day to answer my question.

I want to get across to them that the customer should come first and by no means should they have to pay for a service before it is available to them and that it is there choice when they decide to make use of new users whether that is a week or 3 months after access is granted. We work off a 5-4-4 calendar and revenue is recorded in the appropriate months. Contracts and revenue recognition are treated separately when tracking customer contracts on our system.

The invoice hits AR when the customer signs off on new licences and it is the start date on the invoice that creates the value of that invoice. I feel that the start date should be changed to the date of invoice (reducing the value of the quote at the billing stage therefore charging the correct amount to the customer). No customer has ever came back to me and complained about being charged less as they are aware that a quotation is just a suggestion of the cost and realize that they will pay off the invoice. My concern is with the cost of users only, before tax or additional costs are added.
Revenue is then recorded in that month and roles forward to the end date of the contract and falls into the correct revenue month.

Yes the amount of days is not a large amount, sometimes it is 5 days maybe 10 max but the amount being charged can be large a lot of the time depending on the level of user(s) they need and the quantity which all adds up. My goal is to get a system in place that is applied to all customer's regardless of the amounts being small or large. I conduct full cycle AP also, when a vendor tries to over charge i bring it up with them to revise the invoice. Time is not an issue for me as we have a great team of people that work very well together which allows me to complete all tasks that are assigned to me including all month end responsibilities. If i can get the sales team to stop pushing back (by firmly and professional taking a stand on this) it would add 30 seconds to each pro rated invoice that i process.

I do not feel it is ethical in anyway shape or form to over charge a customer, i want the sales department to realize this as my manager (who is not an accountant) is on board and the reason i posted this was to get advice from people in the profession.

Yes Regis, the sales department are more concerned with the commission and i do like the suggestion to calculate the commission from the start. Thanks Valarie, I will also contact our outside accounting firm to verify this. Thank you again for that advice.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

You may want to consider a different approach. I understand (and agree with) the concern about ensuring a customer receives full value for payment. I also understand that nuisance factor of a quote getting dated and having to be recalculated. Trust me when I tell you that sales will always win that battle.

Rather than worrying about changing the billing amount, change the billing period. If the quote is for one year, have the year start the date the customer signs off on the quote. The problem with that is you probably want to have all renewals begin at the same time for a customer. At renewal time, adjust the following year's amount by giving credit for the additional days you wound up billing due to the delayed acceptance of the quote.

This creates a bit of extra work in accounting but it relieves sales of having to worry about fine tuning quotes for bureaucratic reasons (as sales sees it, at least) and it relieves the customer of having to worry about being over charged or being surprised by an invoice that fails to match their PO.

My former company actually wrote code into the ERP system to accomplish the above. It was working very well at the time I left.

Andrea Clarke
Title: Bookkeeper - Trainee Accountant ACCA
Company: Private
(Bookkeeper - Trainee Accountant ACCA, Private) |

Thanks for your input, i approached the sales department with the change i was going to make and they have accepted. No change of quote is necessary either. It worked out well in the end. Correct accounting, happy sales team and happy customers!

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