Any service company that sells planned maintenance and service agreements, especially HVAC service companies, should be setup for escrow accounting. However, many service companies do not know what escrow accounting is or how to implement this practice within their business model.
What is Planned Maintenance and Service Agreement Escrow Accounting?
Explained simply, escrow is when an asset (like cash) is set aside, pending fulfillment of a condition. As this relates to service agreements, the money collected up front for the sale of a service agreement is set aside pending fulfillment of the planned maintenance work orders set forth in that service agreement.
A majority of service companies collect money up front for service and planned maintenance agreements that are sold to their customers. While these agreements vary by term length, coverage and number of visits, the concept is generally quite simple.
Example: A company sells an annual service agreement to a customer that includes 4 planned maintenance visits. These visits are then scheduled each quarter, usually in advance, with the first visit taking place within 2 weeks of the sale of the service agreement. The money is collected up front, and, instead of being held in an escrow account until fulfillment of each visit (proper accounting practice), it is deposited to the bank for immediate use.
The sale of service agreements solved a very important problem for service companies going back more than 3 decades. That problem: How does a service company keep technicians busy during the slow season(s) each year? The answer: Planned maintenance. Not only was this solution an immediate success for service companies, but customer satisfaction also increased as a result of the perceived care of the business for its customers – another added benefit for companies selling service agreements. Yet, without proper management of this revenue generated by service agreement sales, service businesses will not recognize the wide range of additional benefits.
The problem for many service companies, using the above example, is that these future visits, then become unfunded liabilities; by the time the 2nd or 3rd visit is due, the prepaid cash has been spent.
With Aptora’s complete accounting and field service management software solution for service businesses, Total Office Manager®, escrow accounting is the means by which up-front money collected on service agreement sales is set aside and held in an escrow account, pending fulfillment of the actual work promised in the agreement. Once the condition of completing each planned maintenance work order is met, then a certain amount of money held in the escrow account is free to be recognized as income. This process prevents all of the prepaid cash from being recognized as income prematurely, thus more closely adhering to accrual accounting principles and the benefits thereof.
For example, imagine the sale of a two-visit service agreement. The prepaid funds received from the customer is not yet truly income because no planned maintenance visits have taken place. If the customer cancelled the agreement before completion of any maintenance visits, the company would be liable to the customer for their prepaid money. It is only after each planned maintenance visit is completed, that half of the collected money can truly be recognized as income. Until the condition of performing a maintenance visit has been met, the money is kept in an escrow account.
If your service company is not using escrow accounting, there is never a better time than now to begin. Service Agreement Escrow Accounting is an advanced feature found almost exclusively in Aptora’s Total Office Manager software program. Please contact Aptora for more information about this feature, and our host of other great features.