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Comment on Billing Cycles

April 12, 2023
Comment on Billing Cycles from article on April 5, 2023
          When I saw the post from our old buddy Anon wondering if it is legal to bill for monitoring annually in Massachusetts,  (I guess that he has moved) it got my accountant brain going.  While there may not be any legal prohibitions to billing annually, he may want to think twice about doing it:
          Billing ahead of when the services are performed (especially months ahead) creates something called unearned (or deferred) revenue.  This is money received for services to be performed in the future and it is a liability.  In other words, the customer has paid you, in this case a year in advance, you have the customer’s money, and you have yet to perform the service (monitoring).  Many owners of alarm companies are a surprised when they sell and find that the unearned revenue is deducted from the proceeds.  This is because that is money that the Buyer should have been able to bill, but that the Seller billed (and kept).   The Buyer isn’t going to get the money so the Seller “refunds” it
          Accounts that are billed for more than one period distort revenue (and income) unless the company uses accrual accounting.  For example, if Anon has $100k of RMR and bills it all for a year in advance on January 1, the company would have $1.2 million of monitoring revenue in January and nothing the rest of the year.  An accountant can fix this with journal entries but few companies bother to make the entries.
          Many property management companies have agreements with the building owners that prohibit them from paying for services ahead of time.  Send a $780 invoice for a year of fire monitoring to one of these companies (for a year at $65/month) and be prepared to have them sit on your aging for a long time.  Multiply this by 10 locations and you have created some cash flow issues that you were trying to prevent.
          If you follow this blog and have converted some of your customers to service agreements, then try to bill that same property manager for 10 service agreements at $250 per month each for 12 months.  If they didn’t notice the $780 monitoring invoice, they are definitely going to see the $3,000 (or $30,000 for all ten locations) and, even if they wanted to pay it, they might not have room in their monthly budget to cover it.
          Most companies that offer annual monitoring offer a discount.  I see 1 month free.  This presents some issues, one of which is the actual RMR for these accounts.  If the customer pays $30 per month, but you are only collecting $330 per year is their RMR really $30 or is it $27.50?  If you are giving them $30 to get them to pay early you are in effect borrowing the money from them at around 18%.  Better to get the money from a bank.
          If your contracts renew on an annual basis, you are effectively reminding them that they can cancel.  This is typically not an issue, but it may cause some unanticipated attrition.
          If sending a bill each month is taking too much time, consider upgrading your software to alarm specific software that can handle this task more efficiently.  You may even want to look into taking credit cards or generating ACHs.  The 3% credit card processing fee on your $30 RMR bill is just 90 cents.  Think of the cost of producing an invoice, mailing it, posting the payment and depositing the check.
Mitch Reitman
817-698-9999 XT 101
Reitman Consulting Group
Fort Worth, TX
          This is a thorough and cogent analysis that supports a monthly billing cycle. My recommendation, derived from intuition really, is to set up ACH or credit card payments and to invoice monthly.  I think $30 looks a lot easier to pay than $360.00 and I think getting paid automatically beats invoicing and begging for payment. 
          The Standard Form Agreements shows the monthly payment but permits you to set a different billing cycle.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301