What Is Bill and Hold?
A bill and hold is a type of sales arrangement that enables payment ahead of the delivery of the item. It constitutes a sales arrangement in which a seller of a product bills a customer for the product up front but does not ship the product until a later date. For a transfer of ownership to occur, and the product to be sent out, certain conditions must be met. These conditions include payment for the goods, that the goods be segregated from all other similar goods by the seller, and that the goods be finished and ready for use.
Bill and hold sales agreements are also commonly referred to as "bill in place" agreements.
Understanding Bill and Hold
The bill and hold arrangement may be beneficial for both the buyer and the seller, but great care must be taken by both parties to ensure that all of the criteria are met. If the arrangement does not meet all of the stated criteria, there will be no transfer of ownership. This means that revenue can't be recognized by the seller, and no assets or inventory can be recorded by the buyer related to this transaction.
There have been many scandals surrounding a bill and hold arrangement in the corporate world, and care must be taken when analyzing this type of financial shenanigans.
- Bill and hold agreements represent a sales arrangement in which the buyer pays for the item or items a seller is offering, but the seller does not ship or deliver them right away but at a later date.
- Bill and hold agreements can be positive for both the buyer and the seller, particularly when the seller provides a discount or other incentive for the buyer to provide what is essentially an early payment.
- Bill and hold agreements have at times been abused by corporations as a way to give the impression that they posted bigger sales in a particular quarter or year than they actually did.
Bill and Hold Example
A classic example is Sunbeam’s ploy in November of 1996. To boost sales during CEO Al Dunlap’s “turnaround year,” Sunbeam convinced retailers to buy gas grills a full six months before they were needed—not a bad move if you want to extend the seasonal nature of gas grill sales. In exchange for big discounts, retailers gladly purchased merchandise they wouldn’t receive until months later and still wouldn't have to pay for until another six months after being invoiced. To make the arrangement even sweeter, Sunbeam agreed to store the grills in leased third-party warehouses until customers requested them.
Sunbeam initially booked the sales and profits from all $35 million in bill and hold transactions. However, in response to questions raised by the company's auditor, Sunbeam soon reversed a whopping $29 million of the $35 million in revenue, conceding it was recognized too quickly and shifting the sales to future quarters. Deceptive business moves and subsequent accounting treatments like this have earned these techniques the moniker “stuffing the channel.”