Four words a sales-person dreads to hear from his customer. This is the ultimate nail in the coffin as the customer is effectively telling you to forget your aged receivables.
We are in June, which is when most Indian companies are finalising their books for year-ending March. A familiarly nerve-wracking time for anybody responsible for collection of receivables.
So why is ‘Year-end Book Closure’ such a big deal? and how to avoid your receivables getting into that situation.
Book Closure means the customer entity has finalised its purchase accounting. Any invoices booked thereafter will have to be for a subsequent period. For example, if a company has a year ending 31 March 2020 and it has closed its books for that period on 30 April 2020, it will be very difficult for that company to process any purchase invoices dated prior to 31 Mar 2020 after 30 April 2020.
Few reasons why companies have a strict policy of not booking any prior period supplier invoices after year-end closing are:
- Possible denial of GST input tax credit which could be up 18% bottom-line loss for service companies
- Financial results have already been filed and reported to relevant stakeholders and authorities so its not possible to reopen them
- Possible non-compliance of Tax Deduction at Source (TDS) rules by buyer company
- No budget is current period to process expenses pertaining to previous years
However, some customers do accommodate prior period invoices but with a condition to re-issue the invoices with current date to avoid GST and TDS compliance issues. The supplier has to write-off the GST already paid on the old invoice, which could result in a loss of margin on that sale.
Thus, it is important for accounts receivable professionals to ensure that either they have received payment before year-end, or at least their invoices have been accrued by the customer in the relevant financial year.
This situation could have been avoided had the supplier company sent periodic reminders to customers with stepped up escalation to relevant people in customer’s management and finance teams. This will ensure attention and visibility and avoiding the ‘bills hidden in drawer’ syndrome. It is particularly important to increase the frequency of communication closer to year-end.
SaaS platforms like Kapittx have automated reminders with complete history of invoicing, receipts and balances and also dispute resolution mechanisms, which enable buyers and sellers to be on the same page in the same year.
Happy Book Closing!
Anand Ramchandran Co-Founder and CFO, Kapittx