Service contracts are the bread and butter of your business and you need to make sure that they are generating service revenue to its full potential. Do you ever worry that your contracts are not set up correctly? Are you concerned that you are missing revenue due to contracts not billing correctly?
When we do ERP system evaluations, we find 80-85% of our customers are losing revenue due to contract set-up errors. These errors are not inclusive of meter issues, and when added that number climbs to 95%. Many of these missed revenue opportunities then lead to Accounts Receivable (AR) complications due largely in part to having to collect past due revenue that was not billed in a timely manner. According to D&B:
- 26% of invoices over 3 months old are uncollectible
- 70% of invoices over 6 months old are uncollectible
- 90% of invoices over 12 months old are uncollectible
So, contracts not set up correctly can quickly lead an AR nightmare when trying to collect monies due.
ERP Contract Audits: Areas to Review and More
Service contracts should be reviewed for monthly or even weekly to ensure that there are not errors that will adversely impact revenue. Example areas of common contract errors that will be discussed in further detail include:
- Expiration Dates - Contracts not billing because they have expired or have not yet been renewed. Or, contracts with no expiration dates continuing to bill at rates that are no longer sustainable that have not been reviewed. Many dealers do not want to expire their contracts, so the billing continues past the expiration date. At this point any escalation increases have now stopped, and you are not collecting the additional revenue. This error can also lead to missed sales opportunities.
- Escalation – If you do not have automatic escalations set up on the contracts, or the escalations have expired due to the contract being extended and no longer processing rate increases.
- Missing meters – If a device is missing a meter the invoice cannot be billed for that period. If you do invoice grouping, then the potential for all the invoices not to bill is even higher.
- Contracts billing to leasing companies – Items to consider: Are contracts originally set up to bill the CPC to the leasing company? Do you have an expiration date on the lease? Did the lease evergreen? If lease has expired are you still billing the leasing company, or did you renew the contract and start billing the customer?
- Delivery Method
Many businesses do not set expiration dates on their contracts so that billing does not stop and there is a constant revenue stream, however this practice typically ends up hurting the bottom line in the long run. When contracts have no expiration date this causes your staff not to consistently monitor their health, in fact they are rarely touched after creation unless a change needs to be made. This leads to missed opportunities for potential equipment upgrades for sales. Additionally, any potential escalations that could have generated even more revenue stop. When multiplied by hundreds of contracts, this can lead to serious dollars missed.
Along with expiration dates, annual escalations are a huge revenue generator. Having these set up on contracts so they automatically increase the rates as scheduled is a game changer and eliminates how often your staff needs to touch the contract. If escalations are not set up automatically, chances are you are missing out on revenue.
Accounts Receivables (AR) and the creation and maintenance of your contracts go hand in hand. Because of this, if your billing queue is not being monitored regularly to make sure contracts are billed in a timely manner, this will become an AR nightmare as invoices will not be generated properly if at all. The most common reason contracts are sitting in the billing queue but unable to be billed is due to missing meters. It is important to have procedures and/or technology in place to procure meters from your customers. Items to consider:
- What is the process your business has in place to collect meters?
- Is your team estimating meters? And if so, how many estimations do you allow before getting a correct meter?
- How do you have meter allowance set up for billing purposes once you have a meter?
- Are you entering several meters manually or are you importing them into the ERP system?
Inaccurate meters will cause contract billing issues or will bill the customer incorrectly which negatively impacts the customer’s experience. Our statistics show an average of 5-7% invoice corrections are required monthly due to incorrect meters, which delays payments and creates additional AR collection challenges.
Contracts Billing to Leasing Companies
When contracts are set up to bill the leasing companies, how do you monitor when the lease has expired? If you do not have an expiration date set up on your contracts and the lease has expired are you still billing the contract correctly? For example, if there is no expiration date on the contract and the lease has expired, the leasing company will continue to be billed, and if your AR is not being properly maintained it could be several months before you notice that you have maintained the customer equipment without being compensated for this service. Then the issue arises that you need to void the invoices to the leasing company and rebill the customer. Depending on when this was caught it can wind up being uncollectable revenue. Another example is that the lease expired, and you are still billing the leasing company but due to the missed sales opportunity the customer upgraded their machine with a competitor. It is also recommended that the contract expiration date coincides with the lease expiration date. Your contracts administrator should be generating reports to let you know when these will be expiring within the upcoming year so sales has ample opportunity to upgrade the equipment.
The delivery method of your invoices is also important. Are you printing and mailing out your invoices? Or is E-Agent set up to email invoices daily, so they reach the customer in seconds rather than days? It is recommended to have automated email delivery of invoices setup. This will not only get the invoice in front of the customer faster, but also allows for quicker payment. Another benefit to emailing vs mailing is the money saved in postage, envelopes, paper and other printing supplies, not to mention the time it saves your staff to prepare and send the mail. Additionally, when AR needs to follow up with the customers for payment, the invoice can be emailed directly at that time to ensure they received it.
Do You Need Help?
If you feel your business in a position of needing help in these areas and you do not know where to start, contact Nexera immediately for:
- A complete evaluation of your contracts that allows us to identify areas your company may be struggling with, such as expiration dates, rates not escalating or even missing meters.
- Creation of contract procedures and training for your staff on the best practices not only for creating contracts, but how to monitor contracts monthly. This will include running reports not only out of E-automate but from E-views so you can keep control over your contracts.
- Training on best practices for billing your contracts and importing meters.
If you do not have the manpower to keep up on the administration of your contracts, we are here to accommodate you and can customize a plan that will work best for your company.
If you are unsure about the health of your Contracts, we can provide you a complete review of your e-Automate system to validate the condition of your company. You can see an example audit by clicking the button below.
Written by Dondra Bott – Director of Financial Accounting - Nexera