My small business (7mm revenue) has a problem with not receiving bills from our vendors for 30 - 45 days after the cost has been incurred. This wreaks havoc with my budget tracking, cash flow estimating, and internal reporting because I am not certain I have recorded all expenses until 30+ days after the previous month closes. What is the best solution to this problem?
How do I record expenses more quickly?
Answers
It is likely that you have a reasonable estimate of the amount and timing of these expenses. Have you built a cash flow forecast model (looking forward at least 3+) listing all cash outflows by vendor, whether recurring or non-recurring? This would allow you to input a best estimate of the anticipated cost offset by the aggregate outflows by estimated cash collections to arrive at an estimated "burn." As time goes on, accuracy will improve as the model becomes increasingly comprehensive and robust. It will also help you record accrued expenses should you move to GAAP or modified GAAP reporting.
A different take...
1. You are not constrained by waiting for the invoice. All things considered (especially cash availability), you can ask your vendors/suppliers to issue you the invoice ASAP. I don't think that there is any vendor/supplier that would say..."well, you can wait (30-45 days) for the invoice so you can pay us." Heck, you can even say, you know what, I can do COD (or service) or close to it, just as long as you can provide me with the invoice.
2. As stated above by Romin, you can do accruals. You are the originator of the transaction and you have costings and cash flow projections that you can base it from. It might not be 100% accurate (to the penny) but the expense can be recognized. Though I have to point out that this is "double work".
3. Relationships and communication matter. You have to build a good relationship and communication with your vendors/suppliers as much you have with your customers. Business paradigms of suppliers and customer relationships are changing and the INTERDEPENDENCE between the two is slowly taking prominence.
I have a more pragmatic question. I have never heard (recently with the almost full acceptance computerized
Have you asked your vendors why it takes them 30-45 days to produce an invoice and explained not only the issues that you have, but (from their point of view) the issues it places on their company?
1
Anon
Wayne is right here.
Let your vendors know that if their bills arrive after you have billed your customer, you won't be able to pay them as their charges were not timely.
What our system has in place is a PO Clearing account, which is a liability listed in the payables section. When we receive parts from a PO, inventory is debited and PO Clearing credited. When we receive an invoice for the parts we debit PO Clearing and credit A/P. This way we can look at the balance sheet to see what our total payables are at any given time and know what type of cash balance we'll need. The system does these postings for us so there isn't double work.
What type of business do you own? Do you use cash basis, modified cash basis, or accrual basis accounting?
I can see your problem if you use the cash basis. However, I agree with others that you should have a good idea of your contracted costs when you order the products and services. In this case, there are a variety of ways to track these costs via computer software.
Consider moving to modified cash basis or accrual basis to match costs with associated revenues. This means the expenses will be recorded as incurred and liability accounts will reflect the unpaid balances. (You can also get aging reports and other reports to help with cash flow projections).
In your case (using the modified cash basis model), you would use journal entries to accrue the costs for which you have not received a vendor billing (credit them to a liability account named "Vendor billings not received," or "Accounts Payable Adjustments," or something similar that is appropriately descriptive). Once each vendor billing is received, you would enter it into accounts payable and create an offsetting journal entry to the "Vendor billings not received" account. To reduce the effort required, you could alternatively create a spreadsheet for control and journal entry support, and only book journal entry adjustments to the "Vendor billings not received" account once each week or month in order to reflect the remaining costs for which you have not received a vendor billing.
In so doing, you can avoid pressing your vendors for billings. After all, you currently have an interest-free loan for 30 to 45 days from these vendors -- not to mention any additional time gained from payment terms (such as Net 30). Do you really care why it takes vendors so long to bill if you have reasonably accurate data for making financial decisions?
My advice: address the problem in-house and keep the interest-free loans.
That is quite a long time to wait to receive an invoice from a vendor. If these are repeat vendors and a contract exists, review the terms of the contract. Perform an analysis of your invoices paid over the last 6 months - 1 year to see existing patterns.
You need a Purchase Order system that will give you information on ordered but but not received and received but not billed items. This will then allow you to do more accurate cash forecasting.
We regularly do not receive freight bills until weeks after the shipment. We enter the contracted rate as if it was a purchase order, recording the purchase order as similar to inventory received but not invoiced when the freight forwarder picks up our product. When the invoice is received we enter the invoice as if it was an inventory receipt - we know our liabilities and our expenses are matched against our revenue. There is fallacy in QB's when you lock out the period. Our work around is just before we lock out, we enter a pro forma invoice with a NB prefix, Not Invoiced number. When the invoice is received in the next period, we issue a credit for the NB item and record the actual invoice.
We do the same for certain inventory receipts, but you must be careful to immediately enter the actual invoice when received or your inventory costing (we use average cost) can create significant issues. In my opinion this is one of the major weaknesses in QuickBooks.
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