What Causes Billings in Excess of Costs?
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Billings in excess of costs is caused by businesses, primarily contractors, billing customers in advance before revenue is actually recognized.
In construction, billings in excess of costs is used to help fund projects. It will help prevent them from over-relying on credit to pay the costs they need to incur, such as buying materials and paying for labor costs, in order to complete those jobs.
What Are Billings in Excess of Costs?
As previously mentioned, billings in excess of costs are when customers are billed in advance before the revenue is actually earned to date. Do take note that billings in excess of costs only considers whether the businesses have billed the customers, not whether they have actually been paid by those customers.
Since the revenue is not yet earned, it will be recognized as a liability in the entity’s books. As the job continues, the revenue will be considered earned. The liability will slowly decrease until it becomes zero when the job is completed, as the full amount can now be recognized as revenue.
By billing in advance, the excess amount collected from the customers can be used to pay for the costs that they need to incur to complete their jobs with these customers. These costs include labor costs, material costs and so on.
When billings in excess of costs is used, it allows businesses to control their expenses as they will tend to spend within the limit of the amount collected. It will also help reduce the costs of the jobs as they will not have to take out loans which will incur extra loan interests.
Businesses will have to make sure they estimate the remaining costs required as accurately as possible in order to gauge how much in excess they should bill. If well managed, there will usually be no residual amount to be billed once the job is completed. Businesses will get to keep all of the revenue billed.
There might be circumstances where the customer is underbilled due to the underestimation of costs or overbilled due to the overestimation of costs. To prevent the occurrence of such circumstances, businesses should monitor the progress of the job properly.
It is also common for businesses to have a few jobs ongoing at the same time. They should take care not to misuse the money collected from one customer in one job to fund another job.
If this happens, it might give the wrong idea on whether a job has been billed. If a job is underbilled, it might give the businesses trouble in terms of recovering the costs incurred for the jobs. If it is overbilled, it will look bad on the businesses and might cause the customers to be unhappy with them.
Understanding Contractor Financials
Billings in excess of costs is commonly used as a billing method in sectors like the construction sector. They will issue invoices to the customers in advance before they complete the work. Accountants, financial analysts, and commercial bankers might come across this concept as a part of their jobs.
When the contractors are using billings in excess of costs, they need to carefully keep track of their project status and financials to prevent underbilling and overbilling. This includes maintaining accurate balance sheets and income statements.