How account for finance company fees, box store referral fees, etc.

michael21
Contributor III

Since well before I started here, this company has always treated finance company fees, box store fees, etc. as a cost of sales item.  So, if I sell a finance job for $1000, have materials & labor costs of $750, and pay a finance company fee of $50 I would record that as sales of $1,000 and cost of sales as $800 for a 20% margin.  In testing of the new Payment Collections process, it was suggested that Service Titan's suggested workflow is that in the Knowledge Base article, "Finance Fees/BuyDown: Recommended Workflow".  This workflow treats the $50 finance company fee as a reduction in the job's price, so that sales would be $950 and cost of sales would be $750.  These produce the same gross profit but not the same margin.  The accountant in me says that ST's approach is an understatement of both revenue and cost of sales, something GAAP wouldn't like, but I am curious how the rest of the industry does this.  If willing, any responses on how your company does this would be appreciated.

Mike M CPA & Operations in KC, (go Chiefs)
10 REPLIES 10

rstare
Contributor

Hey Mike, this should address financing fees - https://servicetitan.myabsorb.com/#/online-courses/8b58950b-8557-401f-b014-f7f6892c2c5c

Shouldn't impact revenue this way

@rstare 

Hi Ryan, good to speak with you again.  That is a good course, buy my real question is related to how people treat the cost of the finance fee.  The course discusses 2 method of handling this.  In the first, the fee is handled strictly through payments.  The cost will be charged to whatever account is associated with the payment type used.  In this method, the finance fee isn't considered part of job cost at all, so the example shown has a job with a 100% margin even though there was a finance fee charged.  I suppose you could build an argument that the finance fee was a selling expense or a G&A expense, but that's not a treatment I would be comfortable with.  The second recommended method in the course uses the method described above.  So, I'm curious how other companies in the trade handle finance company fees in their statements.

Mike M CPA & Operations in KC, (go Chiefs)

rstare
Contributor

Hello again!

I used the method above in the video, I think. Main job invoice, customer payment task to clearing account. Adjustment invoice, task for clearing account to return to 0. Payment on adjustment invoice for actual payment amount from financing company, payment for fee with is JE to COGs. Does that all sound right? Shouldn't result in any double revenue.

But I do see what your actual question is around the cost - we use a non inventory material to account for the actual job costing. Does that answer you actual question?

Yes, @rstare, you have answered this from a Service Titan perspective, my question isn't how to process the transaction but rather, do most people treat the fee as a reduction in price or do most treat it as a job cost.  In Titan's documentation and videos, 2 workflow methods are defined.  Under either method, the fee could be handled either way, so I'm curious how others do this.  BTW, on you add a task method you are using, it is correct that the accounting exports will be correct.  What is rendered incorrect is the Service Titan system's display of the job's results.  When looking at the job cost fly-out, the system considers the invoice total to be the sum of all the tasks on both the invoice and the adjustment invoice, so the job cost flyout on Titan is where job cost is no longer valid.

Mike M CPA & Operations in KC, (go Chiefs)

dollface
New Contributor III

@michael21 As a fellow CPA, my financing fees are classified as a contra-revenue account on my GL. From a true accounting perspective, I do not view it as a cost, but as a reduction in gross revenue to arrive at the true net amount, because the cost is not actually required to be incurred to complete the scope of the job, and using this logic, is not incurred to complete this job when a customer pays with other payment types. Knowing this, it is most appropriately classified as a contra-revenue to arrive at net sales.

In ST I have recently been trying to answer the same question you are asking. Before, we were building the financing fee as a non-tracked direct-to-job PO to capture the cost (leading to a slight classification discrepancy between QB and ST - contra-revenue vs COS, still reflecting same gross margin though so to me was immaterial) and bypassing it, then manually entering the financing fee to the contra-revenue account in QB when it came time for the monthly bank rec to match financing receipts to what actually was received). What we switched to doing currently this past week in ST is creating a different payment type that batches as a journal to DR Financing fees (contra revenue), CR the customer AR, then update the cash receipts of the financing payment to the net amount received, which in turn DR cash for actual amount received, CR the customer AR. Customer AR nets to zero owed, cash is appropriately stated, financing fee contra revenue auto-recognized. However with this I am losing capturing the impact on my job costing/margin erosion.

I am considering creating an adjustment invoice on financed jobs and logging the financing fee as a negative task for the amount and mapping it to hit the contra-revenue account, so QB would = ST, but the problem there is I don't think the average customer would understand, and it can cause problems potentially when they go for rebates on the total amount to third-party utility companies. Currently weighing the opportunity cost of this decision. Hope this helps and please let me know your thoughts.

Much more elegant answer than I can give! Thank you for that insight!

rstare
Contributor

I'm not a CPA, so tkae everything I say with a grain of salt, you probably know better than me. But I do not see financing fees as a reduction in revenue. The financing fee is a job cost, a direct COG, in my opinion. It is an expense that would not have been incurred without the sale of that specific job. That being said, the above recommendation, shouldn't change the revenue reporting, nor should have any impact on job costing. In order to account for the job costing portion of that fiancning fee (to get accurate GP margins in ST), we add the financing fee as a non inventory material item to the job.

michael21
Contributor III

@dollface @rstare 

I guess that shows that 2 CPAs in a room will have 2 different answers to any question.  Ryan, I think what dollface is saying is exactly the opposite of what we are doing and what you suggested would be your recommended approach.  Her company treats the finance fee as a reduction in revenue, not as a job cost of sales.

dollface, since I started thinking about this topic I have been trying to figure out how I could implement it if I did decide to go with revenue reduction.  I certainly don't want to send the customer an invoice that nets the finance fee against price for all the reasons you gave plus a significant unease with telling the customer what we paid.  I don't think that moving the negative task to an adjustment invoice will solve the problem either because when the system prints the invoice it will include tasks from the adjustment.  The best I have been able to come up with is creating a separate job within a project and putting the negative task on that.  The job, and the job's invoice, won't show the revenue reduction but the project will.

I understand your philosophy behind treating this as a revenue reduction.  Ours, on the other hand, is we price jobs on a cost plus basis, so the price of the exact same job with finance fees will be different than one without.    That being the case, we treat the finance fee as a cost of sales.  Mechanically, to accomplish this, we put a purchase order containing a non-inventory item on the job.  The non-inventory item is coded to export to a finance company fee clearing account, (debit cost of sales, credit clearing).  When then have a payment type that is also coded to this same clearing account.  When we receive payment, we add a payment record of this type for the amount of the finance company fee.  This exports as a debit to clearing and a credit to A/R.  Granted, our gross margins will be the same, (not margin percent though), but I just feel that since this cost is a part of price determination for us, and since it is very specific to this job, I'm of the opinion that it is a cost, not a revenue reduction.

Good arguments either way, but I do hope that some other contractors will weigh in on this, I'm curious how the split will work out.

Mike M CPA & Operations in KC, (go Chiefs)

dollface
New Contributor III

@michael21 I definitely can see your approach for financing fees as a COS based on your company approach of being able to build a portion of that cost in and collect additional receipts from customers after considering the cost of financing, with a non-financed job not having to be priced the same as a financed one (levied at higher amount, bringing in additional revenue to cover the added cost). I think the mechanics of recognizing that cost in both systems also appears appropriate from the description provided under the assumption that it is a COS. From an accounting theory standpoint, I think that in your case the financing fee may meet the definition of a COS over a contra-revenue, because while the money related to the financing fee technically never comes in (like a contra-revenue) as funding from the financing company, your raising your total sale value to help cover the cost of the financing overall (which would in effect bring in that additional money related to the financing fee after all from increased overall funding received, so no net decrease to revenue if priced right, just a higher cost of completing the sale). I have restrictions prohibiting us from doing this, so the financing fee is not something that I can price into my jobs, so it just comes off the top of what we would earn if the same job was paid via cash/check, and cannot be controlled beyond just choosing to not provide financing options (which we won't do lol). 

I think most companies will treat it as a cost of sale because it is easier to conceptualize and because I think the average company doesn't have as strong of a take on the classification. I chose contra-revenue because that was my interpretation of the theory in my case, the way it impacts my P/L, and my presentation preference - I'd rather see how much of my sales were eroded on the top and what I was actually left with before we even dipped into costs but that was just my preference. Regarding ST's recommendations, I think they are sometimes guilty of presenting a blanket solution for accounting topics, 1 because accounting is not their core competency, 2 because the average user doesn't give these items as great of a consideration, and 3 because it reduces the risk of user error by presenting something that isn't technically incorrect, but perhaps isn't the most appropriate depending on a company's facts/circumstances. Hope this helps!