Many businesses that do work for a client need to acquire goods or assets on behalf of the client in order to produce the agreed-upon work. For instance, a design firm would need domain names or hosting services. A construction firm would need to purchase materials such as lumber and sheetrock or hire subcontractors. A plumbing contractor might need to buy fixtures or parts for installations and repairs. Any expense incurred to complete the contracted work is subject to reimbursement by your agreement and needs to be tracked.
Some businesses choose to provide an all-inclusive quote that may give them the chance to recover those costs (or even profit from them). That approach may leave the business short if it has misjudged the quantity or cost of materials needed. The latter can especially be problematic in today’s inflation-driven economy. Other businesses provide quotes that estimate materials to be obtained but agree with their client that those expenses will be passed along at cost or a specific markup. Either way, these costs should be covered in the agreement with the client (preferably written and signed or even spelled out in a contract).
These costs need to be accounted for and included in invoices. This creates any number of opportunities for friction with the client unless managed properly. Should an item be overlooked, and a follow-up invoice needs to be sent to a client, the act of having to deal with a second invoice could be irritating on the face of it. Invoices sent after what is perceived to be the final invoice are less likely to be paid or can leave an impression of sloppiness that could affect your chance to do additional work. Or you may not be referred to others in the client’s business circle. This is true even if it’s not your fault, such as when one of your vendors bills you late.
At this point, you may even choose to absorb the cost of the product or material and wind up with a reduced profit.
Not all billing is straight pass-along billing
For businesses that perform a number of jobs for a number of clients, there’s the opportunity to buy materials at bulk cost savings. For instance, an electrical contractor may buy more wire or outlets than any single job requires. Those costs need to be allocated and billed in a way that makes sense for both the electrical contractor and the customer.
When you do this, you can choose between billing the per-unit cost of what you’ve bought and inventoried or billing a standard cost for the item. For instance, if a junction box costs one dollar per unit, but you purchased 1,000 at the beginning of the year for $500, your unit cost is 50 cents. You can bill the customer 50 cents for each one used, or you can bill the customer $1 for each one used. Either way, you need to track the cost and bill appropriately.
That requires disciplined record-keeping.
How to effectively track billable expenses
The individual items you’ll need to track are receipts given to you for materials and bills from freelancers and casual laborers. You’ll need to properly invoice your customers and track those. And you’ll need to remember, when necessary, to provide and track 1099 forms for freelancers and laborers who are not employees.
In your system for tracking expenses — whether it’s journals, spreadsheets, or you’re loading your data into a cloud-based document management platform — you should start by setting up specific expense accounts for items that will need to be passed along. For instance, a contractor might establish an account called “reimbursable outside services.” Be sure to keep it a separate category from any “outside labor” account that’s part of your cost of goods sold. You’ll also enter your bills from your vendors into accounts payable in addition to tracking pass-along costs to your client.
On your invoice, be sure to itemize the specific items you’re passing along. This is the advantage of creating those specific expense accounts. You can tell with a quick look whether everything has been properly included and allocated. By creating individual expense accounts, you will also report your correct income for tax purposes. You don’t want to pay tax on your expenses.
There are a number of ways you can choose to store relevant information using whichever system you choose. If you have multiple clients and multiple projects, you may also choose to track your expenses that way. For instance, you may keep all of your expenses listed for ABC Company, or you may track your expenses by breaking them out as Able Project, or Baker Project, or the like. A real estate agent may track expenses by property.
For businesses with multiple employees with multiple credit cards, you may choose to segment your expenses that way. If you’ve set up a system with a physical or digital folder, you can return to that folder to review information in those folders and even produce reports to help you track where you are and gauge profitability. Some examples might be:
- Report for a specific date range;
- Report for specific vendors;
- Report for specific customers;
- Report on specific expense categories for helping budgeting;
- Report which payment types are being used;
- Reports on specific projects;
- Report by tax category for CPAs and accountants — or a complete expense report for tax season;
- Report on reimbursable items; and,
- Report on billable items.
Don’t let billing issues impact client relationships or profits
Remember you’re tracking these expenses so you are billing your customer as agreed while protecting the profits you estimated for the work. Your agreement should cover in advance what expenses are reimbursable and what should happen when the unexpected occurs. If you can bill the client within a reasonable amount of time by providing an itemized invoice derived from the accounts you’ve properly set up and tracked, both parties should be happy.
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