Too Much Profit - Part Two

That is to say, look at the cash flow aspect of the transaction.

Billing your customers for products/services not delivered yet.

For services, you should only recognise the percentage of job completed. You should also accrue for costs (%) that has not been incurred directly related to the job.

In accounting, you should only invoice your customers when you have delivered your products. However, a lot of businesses invoice their customers before delivery because the invoice acts as a confirmation of sorts or a "notice" to get customers to pay before delivery.

This leads to uncertainty to the profitability of the transaction.

1. What if the customer doesn't pay?
2. What if the customer changes its mind and either cancel the order or amend (downwards) the amount billed?
3. What if the cost of the supplying the product goes up and is no longer profitable?

So what should you do?

1. Only invoice a customer backed by a purchase order or a signed agreement.

2. Remember to accrue for the cost, even though your supplier has yet to invoice you.

3. Remember to hedge against any foreign currency fluctuations.

4. Any disagreement in regard to the transaction should trigger a provision for doubtful or bad debt.

5. Go through your customer statements and identify bad pay masters, issue credit notes for returned goods, damaged goods or discounts that you have to give.

End of Part Two