RE: the May 19 newsletter, ACCELERATE #132

I was taken to task by a couple readers who felt I was not emphatic enough about WHAT A HUGE MISTAKE IT IS to create customer invoices before work is done or goods are delivered.

Wrote one…

“In late December we received a large prepayment for product we ordered in January.  This didn't seem like a problem until we received notice from our accountant at tax time that we owed a ton on taxes.  That prepayment that had been invoiced looked like 100% profit in 2009 to the IRS, because the COGS had not yet been applied to it.”

Yup, if there is a payment AND an invoice, it’s a taxable event – income tax and sales tax. But if there’s just a payment, which is what really happened in the above story, there is no income and no taxable event.

But the premature invoicing hazards can be even greater than a tax problem. Here’s what another reader commented…

“…you failed to mention the greatest hazard that an integrator can face when doing his books this way.  That is, that his banker may look at the company’s accounts receivables and assume that it represents money owed for goods and services rendered.  This might lead a bank to approve an artificially higher line of credit.  Later on, the bank may realize its error and revoke the line of credit and put the integrator in non-recoverable financial distress.  This alone should scare companies into making sure their book keeping was done correctly.”

He was describing a FATAL mistake – “non-recoverable financial distress” is a fancy way to say, “kaput / out of business / bankrupt”.

Thanks for putting a sharper point on this. It is bad business to count the money the wrong way.