Better Billing and Invoicing Procedures (Control and Standard Approaches)

Once products/services are delivered to a customer, you create an invoice and submit it to customer, don’t you? That is only a start. A better billing and invoicing procedures should, at least, covers the following two aspects: (a) prudent control; and (b) accounting standard compliance.
In other words, the procedures should be able to lead the billing and invoicing flow in such way so that
erroneous and bad-conduct is minimized, yet revenue recognition rule is well followed. What is better billing and invoicing look alike?
Through this post, I am going to cover a better billing and invoicing procedures that not only minimizes error, but also minimize bad-conduct that lead to asset lost and still comply with the current revenue recognition rules. The first section of this presentation refreshes the accounting standard you should care about when recognizing sales revenue and the second section provides a detail guidelines set on how to handle billing and invoicing process for more prudent control. Read on…

Start with a Question: When Should I Bill the Customer (and Issue an Invoice)?

A good start to handle billing is by determining the right time to bill the customer—creating an invoice and submit it to the customer. From the accounting point of view, determining the right time to bill the customer means you’re attempting to decide what the right time for recognizing a sales-revenue is, according to the accounting standard. By knowing this, you also will know what documents you need to be on your hand for legit billing and invoicing.
For invoicing and billing procedures, two basic revenue recognition rules to follow:
1. Revenue Recognition at point of delivery – You recognize a sales-revenue when the product is delivered to the customer. As far as revenue recognition rule concern, “delivered” means the risk is shifted to the customer. In practice, it depends on the sales term;

• If it is an FOB then you should recognize the sales-revenue when your merchandizes are placed onboard of conveyance (be it a truck, train, air-cargo carrier or sea-vessel, for delivery to the customer. So under this term, you should issue an invoice and bill the customer on the date of uploading the merchandizes on the carrier (usually the date of the air-way-bill for air shipment or bill of lading for sea shipment).
• If it is C&F then you should recognize the sales-revenue when your merchandizes are arrived at the port of destination. For example: You’re a U.S company exporting merchandizes to India, the port of destination could be an airport or sea port in India. Under this term, you should recognize the sales-revenue on date of downloading the merchandize from the carrier to the port.
• If it is full delivery coverage (usually a small delivery by courier) then you should recognize the sales-revenue on date of merchandizes delivered at front of customer’s door—means, follow the date of customer receipt.

2. Recognition when customer acceptance is secured – If you’re in the U.S. you should comply with the SEC’s Staff Accounting Bulletin No. 101 that rules revenue recognition for products delivery with customer acceptance. Under this rule, you’re not allowed to recognize revenue until your customer accept the delivery in all means (quantity, quality and specifications), although you have delivered the merchandizes. The rule assumes not to have been secured at the point of delivery if the sales contract allows the customer to subsequently test the product, force the seller to make any additional post-delivery services, or specify any other work that is required before accepting the product.

Note: A more comprehensive discussion about revenue recognition rules and method could be found [here]—for other types of business in various industries.

So we have just covered the first aspect. Next, let’s go on the second aspect: billing and invoicing procedures for more prudent control. Read on…

Billing and Invoicing Procedures for More Prudent Control

The basic process flow for a paper-based billing system is that the process uses as input the customer order, bill of lading, and customer purchase order, which are forwarded from the order entry, credit and shipping department.
Here are detail steps to follow:
Step-1. Billing staff reviews review incoming billing documentation – Once sales order, shipping docs (bill of lading or air way bill) and customer purchase order (PO) are received, the billing staff should review all billing documents. All customer orders should have been reviewed by the credit department and received an approval stamp prior to being forwarded to the billing department. Have the billing staff reviews the sales order for credit approval. By doing so, the staff should be able to spot few missing credit approval stamps. Any such instances represent a control breach, so the credit department should be notified of the problem at once. In detail, here is steps billing staff should do:

• Matching the sales order, bill of lading/air way bill and customer purchase order to ensure that all supporting paperwork is available.
• If there is no sales order or customer purchase order, she should contact the order entry department.
• If there is no bill of lading or air way bill, she should contact the shipping department.
• If there is no credit approval stamp on the sales order, she should notify the credit department for billing instructions.

Step-2. Billing staff prepare sales invoice – In a case of paper-based invoice (usually in small businesses environment), the billing staff would make sure to use a pre-numbered invoice form—so that she can track the sequence of invoices more easily and will not issue the same invoice number to multiple customers. In detail, here are tasks billing staff should do:

• Unlocking the document storage cabinet and remove a four-part pre-numbered invoice from the top of the stack of pre-numbered forms.
• Entering the invoice number on the invoice log-in sheet. If there is a gap in the numeric sequence since the last invoice was entered, she should notify the Manager about the issue.
• Creating the invoice using the quantities noted on the bill of lading/air way bill and the prices noted on the customer purchase order. She may also need to manually extend all prices and add freight and shipping charges.

Note: Some invoices maybe so complex, involving the entry of purchase order numbers, many line items, price discounts and other credits, that it is difficult to create an error-free invoice. Customers reject invoices with errors, thereby delaying the payment process. To prevent this problem, assign a second person (could be another billing staff who does not involve in creating invoices) to proofread the invoice, recalculate all extensions, and verify that prices match the company price list for the indicated quantity levels. If there are errors, the proofreader should note them on the invoice and return it to the first billing staff.

Step-3. Billing Staff Distributes Invoice – The billing staff would need to burst the invoice into its four component parts. And here are three simple tasks the billing staff should do:

• Submitting the first copy to the customer, wind a reminder phrase “please let us know for changes in billing address“.  The primary purpose of an invoice submission is to allow customers to pay on time. But if the invoice is sent to the wrong address, then this goal is not met. Let’s face the fact that customers regularly move to new locations, you need a simple mechanism to track them. One such approach is to mark the phrase “please let us know for changes in billing address” on each envelope mailed with the invoice; so the next time customer move, they won’t forget to notify you.
• Submitting the second copies to the Accounts Receivable Clerk.
• Submitting the third copy to the inventory clerk.
• Keeping the last copy as a file for Billing department itself.

Step-4. Accounts Receivable Clerk Records and Files Invoice – Once the accounts receivable clerk received the invoice copy, she would then accordingly record sales by entering journal entry as follows:
[Debit]. Accounts Receivable = xxx
[Credit]. Sales = xxx
Last tasks to be done by the A/R clerk is filing the invoice copy into her cabinet.
Step-5. Inventory Clerk Record Inventory Decrease – Based on the third invoice copy received from the Billing Department, the inventory clerk would need to accordingly recognize decrease on the inventory value for the shipped out merchandizes by debiting the cost of goods sold account. Here is an example of journal entry for the purpose:
[Debit]. Cost of Goods Sold = xxx
[Credit]. Inventory = xxx
Final task to do by the inventory clerk is filing the invoice copy on her cabinet.

Control Supplement For Paper-Based Billing and Invoicing Process

In a paper-based billing and invoicing environment, erroneous and bad-conduct tends to happen more often compare to a computerized one. To minimize such tendency, you may want to incorporate the following control supplement:
1. Plug contract verification task before the billing process – For any invoice that being generated based on the terms of long-standing contracts with customers, then a useful control is to verify contract terms prior to invoicing. This approach ensures that invoiced amounts match the terms set forth in the agreement, and minimize the erroneous tendency—hence minimize complains from customer for wrong billing.
2. Monitor customer complaints about improper invoices – Rare and minor error maybe acceptable for the customer, but constant or material discrepancies are not. Continual complain from customer could definitely harm your company reputation. It is always harder to retain customers compare to acquiring new one. Unhappy customer need serious remedial. A good control to minimize such tendency is to include an accounting manager’s phone number on the standard invoice form and encourage customers to call if they have problems. By doing so, unhappy customer get better and serious response compare to if they call the billing staffs.
3. Revise the invoice layout to prevent payment errors or delay – A good control extension in minimizing erroneous is by revising the invoice layout. By using a customized invoice layout, not only prevent erroneous and complains, it also prevent the tendency of payment error. Companies regularly issue invoices that are too complex or cluttered to be readily understandable to recipients, leading to delayed or incorrect payments. As a start, you may want to include the following items as a standard format for your invoice:

• Contact information – Include direct phone numbers and contact person in a contact information box, so that customers is able to immediately make contact your company right away if they found any problems on the invoice.
• Payment due date – Rather than state such accounting-minded payment terms (e.g. 2/10 N 30) which may not work if the customer has no accounting staff, state the exact date on which the payment is due and the amount of the payment due on that date. It also prevents problems with recipients incorrectly interpreting the payment terms or paying based on their receipt date for the invoice rather than the invoice date.

4. Reconcile goods shipped to goods billed – Goods shipped that are not billed are even more dangerous compare to inaccurate numbers on the invoice. It instantly causes loss on the company side. To minimize such tendency, one would need to continually compare the billings to the shipping log. Doing this reduces the likelihood that a shipment is made without a corresponding invoice being issued.
5. Identify shipments of good shipped without billing under the company policy – In the competitive market environment, many companies incorporate a policy to not bill prospects for product samples, as part of their marketing effort. Such shipment could result in confusion when reconciling goods shipped to goods billed. To prevent such tendency, product samples should be noted with “product samples” in the shipping log—so that you can classify and exclude them from reconciliation. A more strong control may require your internal audit staff to verify that each of them was properly authorized.
6. Review all journal entries to the receivables account and inventory decrease – Basically, both clerks should include only entries represent activities in each account they keep. Any beyond entries posted to these accounts may represent an attempt to alter balance sheet or revenue amounts improperly, and so should be actively reviewed for appropriateness.
Last thing to keep in mind is that the duty segregation is always relevant to any controls in any areas. In this particular area, the billing and collection functions should always be segregated. By doing so, it becomes much more difficult for a collections person to attempting for bad intention to access incoming customer payments and alter invoices and credit memos to hide the missing funds. Have a try all or some of the above recommendations for better billing and invoicing procedures at your company. Good luck!