Trying to determine perception of Credit Memos for receiving companies...

I am in a new office and the culture here says that one does not issue credit memos when needed, instead you process an entire credit/rebill and present a new invoice to the client. I have never heard of such a thing, outside of exception processing or unposted invoices.

I find this practice counterproductive and mis-leading for our bank. When we identify a problem with an invoice after 30 days, we should be able to issue a credit memo so the client can apply it to the originally 'dated' invoice and get it paid. When you credit/rebill, the invoice drops off the aging and shows up again as a different transaction. This also gives the client a new start date to begin the aging process before payment.

I want to make sure I am not crazy, as the staff here is adamant that we should never do that.

Answers

Simon Westbrook CFO • September 6, 2011

The process you describe doubles the amount of paperwork and ledger entries, which doesnt sound logical, however I have found some companies that that insist on a clean invoice. Typically, this relates to businesses that recharge the product or service that you are billing and correcting for. Their concern is that where they have to provide copies of their costs in support of a re-charge, they want the paperwork to be clean (and final) so it is easy for their client to check and compare the in-cost with whatever they are being billed. Having two documents, invoice and credit note, not only makes the comparison slightly more difficult, but also opens up scope for doubt on your invoicing procedures and why invoices were incorrect in the first place.

You didnt say how this process was justified in your discussion, and whether the "culture" is an integral part of the accounting procedures manual, but I suggest you research the reasons given, and, if not convincing, make your mark by recommending changes to improve efficiency.

Kevin Peterson Corporate Finance Leader • September 8, 2011

We've had clients who desire both approaches (clean invoice or credit memos). To avoid the churning of invoices with the clean invoice approach, we make sure that the credit memo and the reissued invoice has the same invoice date. That way your aging will be ok and your bank will be satisfied that you are not trying manipulate your aging.

Len Green Performance Improvement Consultant and ERP Strategist • September 9, 2011

Have a look at your ERP system. Does it support:
1. a document date separate from a GL posting date (e.g. so you can date an invoice or credit memo as 8/12/11yet post it only today 9/9/11 -assume August period is closed)
2. linking either a credit memo or a re-invoice to the original invoice? E.g. how will you connect the latest version of the invoice to the underlying shipment etc and retain audit/transaction trail. Don't forget potential sales tax rate changes too:)
3. Can you change the due date on the re-invoice to be the same as the original invoice, thus avoiding re-aging and extension of terms? You don't say whether you are selling goods or services, that may also affect this.

I think the question of re-invoice vs credit memo for the difference may depend on customer terms-some government agencies or large corporations demand a fresh invoice,so if you can, simply negotiate it away and tell your customers and sales staff that your system requires you to do it the way you want to do it.

In the end, look at your process options then look at how you can configure your ERP system to suit those requirements.

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