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3rd Party Supplier delaying ability to invoice

Payments months overdue as information to raise invoices withheld

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Hi team,

So I have a client. They have engaged a third party to produce and fullfill merchandise on their behalf. In this arrangement, the 3rd party does all the work and takes 20% of the net profit. The 80% remainder is for the client who invoices for this amount to the 3rd party when the figures are provided. 

Here's the fun bit. 

The 3rd party are meant to supply the remittances of all sales, cost and profit on the first of the following month. This also includes the profit split where the client can invoice the remaining 80%. The 3rd party has not been supplying the remittances needed to raise the invoices for months at a time, ignoring requests from the client. Once the invoices are raised, even though they are late, they enforce 30 day payment terms as per the contract, and even then, they pay late. 

Now, everything after the invoice has been issued, sits with credit control and is all fine in terms of process. However, where do we stand with the delay to provide the information required to raise the invoice?

What has happened is the 3rd party has played this game and effectively have given themselves a 6 month payment term... 

When the remittance is 3 months late, they still insist on the 30 day payment terms for the most recent invoice. 

Is there anything that can be done in these situations? I understand playing the cashflow game, but this is excessive. Is there any avenue with regards to ethics/professional standards as this is being driven by a qualified accountant. 

Also, in terms of accounting, the sales were made in the in previous financial year, there is no accrual as the sales volume wasn't known, the invoice was raised in this financial year, is there any consideration needed. There is no transaction cost available to the client in the last financial year, so under IFRS 15 we can't recognise the revenue. Is that correct? Even though these numbers would have been known by the 3rd party. 

Thanks!

Replies (16)

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Melchett
By thestudyman
26th Oct 2021 21:02

This seems to be a legal rather than accounting question. Not seem the terms and conditions but it seems like it is heavily weighed in the favour of the third party.

Would worry less about the consequences for the accountant, they are probably being told by the directors when to make payments and when to send the remittances.

Client could sit down and renegotiate the terms and conditions so for the third party to not delay sending their remittances. Or...they should stop the relationship.

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Replying to thestudyman:
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By RajD
27th Oct 2021 11:02

Thanks. Yes I agree, the contract needs looking at.

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By paulwakefield1
27th Oct 2021 08:38

I am not familiar with IFRS15 but I am surprised if you cannot recognise revenue. The entitlement to income arose in the previous FY even if the information was not available until post year end to accurately quantify it.

Given the 3rd party does all the work and appears to take the risks, the 20%/80% profit split in favour of your client seems to be a cracking deal for your client. So perhaps some game playing is understandable.

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By Tax is always taxing
27th Oct 2021 09:19

Who drives the sales and orders? You say they are contracted to fulfill merchandise on behalf of your client... so does your client not know what orders they are fulfilling?

I'm assuming this is a unique or patented product in some way, otherwise I can't see any reason the third party would be doing this deal, seems very one sided.
Unless of course this is massive volume and scale, in which case the lack of legal agreements to support your client seems strange.

In terms of the accounting, you get the information eventually so can adjust, not ideal but I could live for it for an 80% risk free with no work involved.

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Replying to Tax is always taxing:
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By RajD
27th Oct 2021 11:31

The client drives all sales through a website that is managed by the 3rd party. The client can see sales volumes and gross revenue however doesn't see the costs and needs to invoice Net.
Products are unique and have copyrighted artwork.
See my explanation of the process in a separate comment.

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By bernard michael
27th Oct 2021 09:22

Change the 3rd party as soon as practicable

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Routemaster image
By tom123
27th Oct 2021 10:13

If I was doing all the work for 20%, I wouldn't be rushing to give away the 80% either.

Away from the rarified practice work, it is dog eat dog, and buyer beware.

Big guys push the little ones around all the time.

Just because someone at the 'big guys' is an accountant, doesn't give you carte blanche to go running off to tell teacher (or institute).

Your client either accepts he is getting risk free income for no outlay, and it comes after a while, or he finds someone else, or he gets better at negotiating and enforcing contracts.

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Replying to tom123:
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By RajD
27th Oct 2021 11:47

lol, dog eat dog indeed.
I've explained the process in a separate comment for context.

Regarding running off to tell teacher - I'd disagree on principle hence the question - we have accountability and a code of ethics. That is a huge fundamental of the qualification.

I think BECAUSE the big guy is an accountant, it gives me recourse to run to teacher. Else does it not just undermine the rest of us? However, I accept the reality may be that no one cares, I'd like to pretend teacher might give a sh*t and I can use it as a veiled threat.

To spin it a different way - what are the accountant's responsibilities to his employer (3rd party) in dealing with client contracts, breaking terms of a contract and opening them up to legal consequences.

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Replying to RajD:
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By paul.benny
27th Oct 2021 12:02

The ICAEW ethical code largely speaks to behaviour vis-a-vis clients - so covers areas such as competence and objectivity. It does not really address commercial practices as long as they are lawful. You may think it should speak to business practices (as I do), but that is a separate debate, fraught with practical difficulty.

Is your client's position the result of a badly negotiated agreement or breach of the agreement? If the latter, client's remedy is at law rather than through ICAEW.

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Replying to paul.benny:
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By RajD
27th Oct 2021 12:21

Thanks for this, nice explanation.

100% breach of agreement.

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By RajD
27th Oct 2021 11:23

To clarify how the 3rd party setup works - when I say they do all the work, it's not strictly all the work. The merchandise is designed by the client, the artwork, the style etc and in some cases they also source the raw materials and negotiate the deal.

The 3rd party manage the online store, by adding products when they designed. They also hold stock, at their cost however for 90% of the goods, they are effectively drop shipped by another supplier, so actually the 3rd party, don't do anything here as the order goes from the online store directly to the actual supplier, who produces the product on a job basis, packages and delivers it.

So in effect, the 3rd party here, are getting 20% of a very high sales volume, for uploading products to a website and managing any returns and exchanges. They don't even provide informative sales data for the client to decide which products to push and the client does the advertising and promo.

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Replying to RajD:
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By RajD
27th Oct 2021 12:25

Should say too, having looked at the commercials and my knowledge of the products and retail/ecommerce, the 3rd party are definitely inflating costs and skimming. But it's just too much to raise that and I accept this is the business of a middle-man. In addition to being paid to facilitate a dropshipping process and holding onto approx £100k of profit for several months... I'd say they are doing well in this arrangement.

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Replying to RajD:
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By Bobbo
27th Oct 2021 13:01

You've gone from saying the 3rd party do all of the work to now basically saying they don't really do much.

If 90% of the goods go from actual suppliers direct to customer then perhaps these actual suppliers can report sales volumes to you? (As i assume, contractually, they are selling the goods to you and you are selling them on to end customer.) Then its just the remaining 10% plus refunds etc you need to squeeze out of the third party.

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Replying to Bobbo:
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By RajD
27th Oct 2021 13:35

lol yeah fair enough. Consider it from the client's point of view. They create the products and then hand off everything else to the 3rd party. To them, the 3rd party do everything.

The reality is different as explained. But the client pays (20% cut) to remain oblivious to this. Assuming an honest trusting relationship.

The client has recommended some of the suppliers but doesn't know if these are actually used and can't see the invoicing between them.

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By thomas34
27th Oct 2021 11:41

A salutary tale by the sounds of it. Sounds like the client entered into a contract with (let me guess) a limited company. Also I suspect that the client didn't do a proper credit check on the company. The company will either be so big that they don't care or so small that they'll have no balance sheet worth. In these circumstances the first thing I do is check for the latest accounts at Companies House (subject to legal status of course).

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Replying to thomas34:
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By RajD
27th Oct 2021 11:56

Yeah, limited company. Accounts show a recent large bank loan. Everything screams cashflow problems.

Thankfully, we've managed to get payment for half of what is owed, the rest to come in a few weeks and additional remittances due next week, which we will ensure to chase.

Then we'll probably renegotiate the contract to install some SLA's on information delivery. However given the whole remittance delivery thing, I still think there is some work to do from a legal perspective as there doesn't seem to be any course of action we can take except end the contract if they just ignore their responsibilities here.

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