A few of our clients have started a practice that they have termed "reverse invoicing". Essentially, they have told us to stop billing them and they pay us directly via the T&E entered into their enterprise system. (we are in the Professional Services industry). We bill on a monthly basis and our clients are paying us monthly but based on a weekly data pull. The discrepancies therefore are many and very difficult to track and fix because once we discover a difference between our system and theirs, often times we have already received payment or they have closed their T&E period. We have therefore resorted to simply waiting until project completion to address discrepancies, often having to write off hours on our side. This also puts us in a tough spot because we are unable to generate an accurate AR to justify the work we have completed. We tried at first to just continue as normal and apply the payments as they came in. What we discovered was that we had many outstanding invoices, all with partial or non-matching payments applied and it wasn't an accurate reflection of our days outstanding. I have been instead recording a Revenue Accrual each month and then when we receive a payment, I generate an invoice to match the amount of the payment and run it through the accrual. I hope that from an audit perspective I am representing our books correctly. I also wonder how our clients are representing their AP if it is solely based on our employees entering T&E into their system. It feels as if the controls would be weak at best. Do you have any experience with this? I would love to hear from anyone involved on any side of the transaction, including any audit concerns! Thanks in advance.
Have you heard of Reverse Invoicing? How would you recommend recording it accurately?
Answers
I just recently left a small 'Buy Here Pay Here' car dealership for similar practices. As of the end of 2009, the IRS began allowing these types of businesses to operate both a dealership and a related finance company, both separate entities, but related through S-corp common ownership. Under the old method of operating on one entity for everything, the small dealerships would amass a lot of income (on paper) in one year, but it would actually be an average of three years before they would collect all of their profit. The
Here's where I'm going with this--> Under the new tax structure, many of the dealers began taking in large cash down payments and co-mingling them with their other investments. The entities are now becoming popular every-day money laundering outlets. They are an AUDIT NIGHTMARE now. I can't even begin to get my head around how YOU would be able to reconcile, audit and even have someone certify your financials after dealing with some of your clients.
I'd also be curious to know from your perspective if you're even able to positively say, "We're making x amount of profit and this is worth it."
You and I know there is no such thing as 'reverse invoicing'. It is far outside GAAP and personally, I'd begin shedding some of these clients. The money you may be making now will pale in comparison to what could potentially be owed to the IRS on both sides. You and I also both know that the IRS does collect at some point.
I can also go on to tell you that many of your clients will be here in business under one company today, then closed and open under a whole new name tomorrow. If I am understanding T&E as Travel and Entertainment from your perspective, there are two types of T&E deductibility and three points of declaration for the 50/50 and 100 on your 1120 <-first 50 is allowed, second 50 is recorded on books but not deducted.
When anyone who runs a company begins to manufacture
On a final note--I once conducted an audit of a company I took over as
Sorry for the novel, but I hope this helps.
Lindsay
It sounds like the services version of the process in product based companies called ERS (Evaluated Receipts Settlement) and popular in companies that have well defined contractual arrangements with key suppliers with well defined products. In these cases, the company buying the product simply uses the warehouse receiving report (for item and quantity) to confirm product received, and creates an automatic payable by reading the unit price/terms from the contract on file in the ERP system.
If your clients
1-know what rate per hour your staff are being charged at, and the payment terms
2-know how many hours each person worked (from their own T&E system), then
3-they don't need your invoice to tell them what they owe. It saves them time processing an AP invoice for starters.
How can you align your processes with your clients so that you can minimize time reconciliation and error detection? Can you get a timely data file from each client that supports their payment, use that to check for discrepancies? Consider talking to your counterparts at the clients to get them to understand your mutual needs.
Your staff need to be brought into the process so that you can get them to understand the importance of data and aim to avoid duplicate entry of data. The process needs to be designed and implemented before you rely on systems to help you.
Regards
Len
1
Another possibility is to align yourself with their EDI system if it exists. While EDI for non-inventory vendors is a small nightmare (for those not familiar with EDI - Electronic Data Interface, it was built as a way to track inventory in the supply chain, as well as the accounting), it may solve many of your issues.