Page 158 - Budgeting for Managers

Tracking Your Budget
Don’t Accrue Income When the
Contract Is Signed
It might seem reasonable to set up an accounts receiv-
able schedule when a contract is signed.You expect to bill on a certain
date and be paid on that date. But it’s not a good idea.The contract 141
might be cancelled or delayed for any number of reasons.You do not
want to show income for work until the work is completed and the
invoice is sent to the customer.
The proper way to track income projections from a contract is
through your budget, under estimated income.You might want to
divide estimated income into two categories: committed (for contracts
or agreements signed by customers) and possible (for estimated sales
and contracts or agreements under negotiation).
That means that you track your commitments to spend
money, rather than only payments you make, and your con-
tracts to earn money, rather than only payments you receive.
When you sign a contract indicating that you’ll do work and
earn money, you accrue the income. When you complete the
work and bill the client, you set up the money in accounts
receivable. When the client pays and you deposit the check,
you credit the income account with income received and credit
your bank account with the money you deposit.
For example, suppose a consulting firm estimated that it
would do work for three clients this month for a total of
$300,000. One of the clients wanted one week of work at the
beginning of the month for $80,000. That work is done and
the client has been sent an invoice. A second client has signed
a contract for two weeks of work at $150,000. The work is in
progress and the client is not yet billed. The firm is negotiating
with a third client, but there’s no signed contract yet, so the
firm can’t count that in the committed part of estimated
income. Table 9-3 illustrates the estimated income and
accrued accounts receivable for consulting work for the
month.