Do They Owe Me the Money or Not?

Basic accounting rules teach us to recognize revenue when the product or service is delivered to the customer. OK- what does that mean? Well, that can have many meanings: when you physically deliver the goods, the tax return or the oil painting is one example. Another possibility is by contract. Maybe the document says you’re paid 30% of the final price once the building is 30% complete. There are many possible definitions for revenue recognition.
It’s critical that all parties understand when work is considered “completed” and when payment is made. Recently is St. Louis, a jury “awarded $550,234 to a former sales executive for HBE Corp. on his claim that the company cheated him out of commissions by firing him before he collected them.” The company “contended that he (was) fired because his worked slacked off.” The company claimed they didn’t owe the salesperson the money because he wasn’t working there when the company was paid.
The salesperson said he used “common sense” to understand what “earned commissions” meant. Each commission was based on projects that “went to fruition” after he left. In this case, there were multiple decision-makers who were involved in the sales process. It was not clear who was the final decision-maker, or if the decision was made buy a group of people.
The Lesson: The larger the individual order or project, the more important it is to get written clarification on when payment will be made. If a large payment is in dispute, the payment delay can disrupt your company’s cash flow.
Your Homework: Have you had a recent dispute over a payment? Could it have been avoided with a written contract? Was the dispute with a new customer, or a long-time client?
(Source: “Former HBE salesman is awarded $550,000”, St. Louis Post Dispatch, 7/21/07)
Key Word: revenue recognition, cash flow