Billing Paradigms

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Introduction

Businesses cater to the shareholders’ interests by satisfying the demands of customers. Customer satisfaction yields handsome revenue and enviable profit if the business is efficiently managed. Accounting and business laws necessitates the realization of revenue only after the service is delivered to the customer.

While customer demand is captured in any business application through a sales order, subsequent supply or the service offered is documented by delivery and transport documents.  These artefacts represent the demand and supply components of business enabling way forward for the revenue which the business and the stakeholders’ interests lie in.  This is enabled by a billing document or an invoice document and further corrections if any is handled by means of credit or debit notes as applicable.

Demand from customers vary in size, type and nature. While some are products, others can be services. Certain demands are onetime and single, while some service requirements are staggered, periodic and incremental. Such diversities on the demand portfolio and hence the multitudes of supply modes necessitates the revenue booking in the system to have the atleast same level of diversity if not much complex.

Billing Models

The most primitive and the simple form of revenue booking is applicable in the consumables industry. By far, this domain attracts most of the household spending towards their basic needs of food, cloth and shelter. In these cases while the customer provides an order, the demand can be immediately met thus becoming eligible to book revenue generation in the system. This simple form of revenue generation is documented in the system by means of an invoice document. As this kind of invoice booking always proceeds after delivery and with reference to the delivery, this kind of revenue generation is enabled in SAP by Delivery related billing. Here the invoice is generated after the delivery and posted as revenue to be received. Such common mode of business is prevalent everywhere from supermarkets, consumer durables and basic life supporting products.

Another evolved form of business exists where an invoice document is generated immediately after booking a customer order. This is proceeded by delivery instantaneously after receiving the payment. Unsurprisingly this can happen in a sellers’ market for products very high in demand.  The classical example of the system exists for new models of vehicles in automobiles industry, where brand conscious customers are willing the pay in advance. This model of revenue generation is enabled in SAP by Order related billing.

The emergence of online portal sales also predominantly uses this model, but by creating a proforma invoice to the customer when the order is booked. The delivery happens later. The income generated in this model may be booked as advance towards the sale or directly as revenue depending on the time of delivery.  In this scenario if business wants to book revenues only after delivery, the option of creating a proforma invoice is available. In this case, an invoice is created in SAP but without making any impact on the books of accounts. However the customer gets the invoice copy and pays for it. This is followed by delivery and an invoice, in this case with reference to the delivery itself.

Diversity exists both in supply and demand. Certain services need to be offered at regular intervals managed within an umbrella of a contract spread across multiple periods. In case of utilities service providers, payments are to be provided on periodic basis for the service offered during that period. This is done by means of a sophisticated billing method called the periodic billing within the SAP business process offering. Variants of this type offers the facility of invoicing the customer either in advance or at the end of the servicing period. In our regular life, all the utilities like water, gas, electricity are offered and revenue generated using this form of billing cycles. The functionality is versatile enough to handle hourly billing intervals to yearly billing intervals and hence is one of the most robust forms of billing to be followed.

Engineering, Construction and Operations (ECO) industries adopt a unique form of billing to suit their long project duration and promotes completion based invoicing or progress based invoicing. These industries typically have projects spread across many years. It is not possible to offer the service for the entire period of the project waiting to realise the revenue only at the end. Monitoring the progress of such long term projects and revenue generation based on the completion of minor or major milestones is a reasonable and also legally acceptable way of generating revenue by the servicing organization. This form of revenue generation is enabled by Milestone Billing in SAP. In this case both the projects and thus the progress of the customer and the orders given by the customer are managed in SAP. While any other billing forms enable business to match revenue with sales, this model links revenues with specific milestones of a project and thus capture the progress of the project too. Detailed analysis of the project progress and the completion reports can also be done if projects are managed within SAP. There are various revenue recognition models available for this form of billing which can be time phased or percentage of completion based that can be followed to represent the correct revenue generated for a particular accounting period.

Huge capital intensive projects will require extensive capital and this can be requested by the project management team to its sponsor or customer. This is enabled by a rare form of billing request called the Down payment request. This form is request is same as milestone billing only with the difference that the capital is requested not at the completion but for initiating work towards a milestone. This is also the form of invoice request prevalent in the ECO domain with long project duration involving mammoth capital requirement. Most of the public sector projects and government initiatives will be handled through this way. Financially the money received through the down payment request needs to be accounted as Unearned Revenue and not as revenue as in other cases. It is only when the work is completed, the unearned revenue is converted into revenue either directly in finance module or through a milestone billing document and reconciling the unearned revenue figures with the receivables amount.

Sometimes customers are left unaware of the capital requirement for the work and want the work to be billed only as per the resources involved, with a markup and not through any other form of pricing. This kind of practice exists mostly in staff augmentation projects where the supplier provides the resources alone to the customer and issues the invoice as per the resources used by the customer. The usage patterns of resources can be tracked through various means like timesheets, internal orders, cost centers or any other kind of cost objects. The costs accumulated in these cost objects are absorbed in the sales order as the actual cost and a markup is enabled to arrive at the final invoice value to the customer. This methodology is followed for unskilled and low level skills like housekeeping, monitoring, security services, freight services etc.  While the invoice is generated in the sales module, the actual cost is captured in different areas based on the kind of service offered to the customer and the functionality is rightly called as Resource Related Billing. As the functionality is much more liberal to capture any kind of billing requirement, it will need seasoned architects across multiple business functionality streams to enable this function in the system.

I will conclude this write up with the last form of billing called the third party billing where the customer don’t see any difference in the service offering by the vendor but the vendor sub-contracts or buys the product from sub-vendor to deliver to the customer.  To optimize the logistics cost and time, the vendor may ask the sub-vendor to directly deliver to the customer and send the invoice to the vendor. Based on the invoice the vendor receives from the sub-vendor, he will create the invoice to the customer. The billing may rightly be called as three party billing rather than third party billing as the customer don’t feel the existence of a sub-vendor. This form of billing is highly prevalent in trading business where people will facilitate the supply chain for multiple products through liaison between manufacturers and customers.

Conclusion

Time of generating an invoice, amount of invoice, mode of invoice and the link between invoice and the service have been the basic determinants leading to the diverse billing models. Once the billing document is generated and handed over to the customer, dedicated collection houses can be deployed to ensure quicker receivables turnover as this help better working capital management and operational efficiency. The efficiency of collection of receivables will have impact on the entire operating cycle. Understanding the importance of different forms of billing, the billing and collection function has very recently evolved as a different service and is floated as Billing as a Service (BaaS) as discussed in detail in the link Billing as a Service .

Billing or invoicing is not the only one as diverse as the kinds of soil. We will look into the forms of delivery modes in consecutive write ups.