Capture the Elusive Unbilled Receivables
by Guy Cabeke, Associate Principal, REL
At first glance, the mechanical interpretation of accounts receivables appears to be simple: provide a product or service to a customer and receive payment for it. Unfortunately, the reality cannot be further from this – a number of factors impact the effectiveness of this process. These factors can delay the time in which payments are received and therefore increase days sales outstanding (DSO) and negatively affect working capital.
According to The Hackett Group’s 2013 Working Capital Survey of the largest public companies in each region, there is significant opportunity for improvement in working capital overall, with $1,061bn in the US and $980bn in Europe (Figure 1). This opportunity could be seized by process improvement to release the amount of cash tied up in working capital.
Accounts receivable is shown to be the greater area of opportunity for both regions. The US survey identified a total of $459bn in opportunity for accounts receivable; for Europe the opportunity is $350bn. This opportunity relates to billed receivables and does not consider the amount of unbilled receivables that may exist. More often than not, when looking into improving accounts receivable performance, the value of unbilled receivables is not considered.
Unbilled receivables are receivables for which the product or service has been delivered but the invoice has not been generated. No charges have been sent to the customer, and therefore the receivable is not collectable. Unbilled is also referred to as accruals, accrued billing and revenue shipped not billed, but the accounting term is accrued receivables. It is important to note that accruals may not account for all unbilled receivables. Typically, a company will accrue for known unbilled receivables, but it is possible that unidentified unbilled receivables also exist. Accruals have to be reported on the balance sheet as receivables. It is not always possible to invoice accruals due to contractual agreement or lack thereof; for example, if the customer demands month-end or milestone invoicing.
Expected unbilled receivables are particularly prevalent in those sectors that provide complex project-type based services, such as IT, engineering, construction, advertising and telecommunications. In these industry sectors, milestone billing is typically used. Sending the invoice to a customer does not guarantee that it will be paid on time or in full. Although many factors cannot be internally controlled, ensuring that the invoice is generated and delivered in a timely manner is within the organisation’s control and can be achieved by having a defined order-to-bill process and proper internal controls in place.
Even though unbilled receivables are quite often a necessary side effect of conducting business in certain industries, the value of unbilled is also often due to inefficiencies within the billing process. Some of the reasons leading to unnecessary levels of unbilled receivables are:
The lack of an automated billing trigger upon product shipment or delivery (whatever the point of revenue recognition may be)
It is best to ensure the billing system is equipped to automatically generate the invoice upon the point of revenue recognition, or at a minimum to flag invoices to be generated. Implementation of this type of automated invoice trigger may require some ERP modifications.