Accounting Industry Billing Models: Fixed Price Agreements In-period

This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
Get a copy for your desk at www.linkedpractice.com

In-period is where we bill for the annual accounts work over the 12 months. It is the worst option for cash flow, but the easiest way to onboard new clients.

When using the in-period method, we bill for the annual accounts in the same year we are completing them, eg. we would be billing for the 2020 annual job during the 2021 financial year. This differs a lot from the other two methods where we are billing for the 2021 annual accounts in the 2020 year, so we collect the funds up front and then do the work. Whereas under the in-period method, we are completing the work while the client pays for it over a 12-month period.

The downside of this method is we might finish the annual accounts in month two, but the client is paying the work off over the following 10 months. The counter argument to this is that some clients will have their work completed in month one and some in month 12, so it all works out at year end, as long as the monthly fees are covering monthly salaries.

This method accumulates negative WIP against the jobs that we have not worked on yet, and positive WIP for jobs that have been completed.

Let’s look at an example:

Say we have a client that we complete both GST and annual accounts for and we are charging the client $500 per month, being $6,000 for the full year's engagement. At the start of the 2020 financial year we will have billed nothing, and done no work, so our WIP is $0. After the first month, we will have billed $500, and still done no work, so our WIP is now negative $500.

At the end of the second month we will have completed the first GST return for the year, which incurred $300 of billable time. We will have also billed another $500. So we have billed $1,000 so far, and put $300 of time on the job, so our WIP is negative $700.

On the third month, we complete the annual accounts for the client and incur $5,000 of billable time. We now have $5,300 of billable time on the job – $5,000 from the annual accounts work and $300 from the GST we did last month. As we have only invoiced $1,500 so far (three invoices at $500 each), we have $3,800 of WIP.

Over the next nine months, we will be collecting the payments for this work while completing the remaining GST returns. As we still have GST work to do, we hope that by the end of the year we have not used up the entire budget of $6,000.

Following is a diagram that illustrates how this works:

Note that this diagram shows the job being created two months before the financial year starts. This allows the practice to schedule all the tasks on the job in the two months leading up to the start of the financial year. The alternative is to have the job open on the first day of the start of the financial year. If this option is chosen, scheduling will have to be done once the financial year has started.

The annual accounts task shown in the diagram is for the previous financial year. In the other two methods we showed the annual accounts task being completed in the next financial year because it was billed in advance, whereas under the in-period method we are billing for the work we are completing in this financial year, and spreading the payment over the 12 months.

Enjoy this article? Buy the book.

Need help setting up, fixing up, or getting up to speed on Xero Practice Manager?

We can help at www.linkedpractice.com