Treatment of Reimbursables

When looking at a company’s total sales, check whether the company is considering certain reimbursed expenses as revenue. One example of a reimbursed expense is shipping and handling costs. The seller is charging for direct expenses it will incur but for which the service is usually performed by another party such as the post office. Another example would be a consultant who bills the client for travel expenses.

Typically a company will report revenue only for products and services it provides. If the post office is actually handling the shipment, or the airline is providing the travel, is it appropriate for the shipper or consultant to consider these items revenue? If you were running a small business, would you consider such items to be revenue, income, or just expenses that are reimbursed?

On the other hand, consider the same consultant, whose travel expenses include mileage on a personal vehicle, and for which the mileage reimbursement rate exceeds the actual costs of operating the vehicle. Should that be considered revenue? How about a contractor working on a cost-plus basis who passes on the costs of certain materials but also is able to add a profit margin?

In the end, the important thing is to be on the lookout for companies that report reimbursables as revenue. They can be considered on a case by case basis for such factors as whether they serve to boost revenues above a certain threshold that may attract investors or help the company meet a debt covenant; whether the reimbursed expenses help boost revenue growth rates; and whether these reimbursed costs appear legitimate.

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