This document explains how interest for late customer payments is calculated and charged. For information on how to bill a customer interest for late payments and the starting conditions that must be met, see Invoicing Interest for Late Customer Payments.
The purpose of invoicing interest is twofold:
In most countries, it is allowed to bill a customer reasonable interest for a late payment, since paying too late can be regarded as an unauthorized loan. However, the rules for when and where interest invoicing is permitted vary from country to country and between different lines of business.
What To Consider Before Invoicing Interest
Three questions are important when deciding whether interest should be invoiced:
Is it accepted in our customer's culture? For example, the acceptance of interest invoicing is lower in the Latin countries than in Scandinavia.
How will this affect our relationship with the customer? Consider whether invoicing interest may cause complications or a potential loss of goodwill in the eyes of an otherwise reliable customer.
What are my own costs for invoicing? The administrative costs for creating and monitoring interest invoices should be considered as well as the time that may be required to deal with a problematic customer regarding the invoice.
According to the agreement with the customer, interest is invoiced based on one of three calculation bases. The proper calculation base to use is defined in 'Interest Invoicing Rule. Open' (CRS460/E). The rule is then connected to the customer in 'Customer. Open' (CRS610/K).
The calculation bases available are:
Interest is calculated from the due date for invoices paid too late and open invoices that are past due.
Interest is calculated from the invoice date for both paid and unpaid past due invoices.
Interest is calculated from the invoice date for all invoices, even if they are not past due.
Interest from Due Date for Invoices Paid Too Late and Open Invoices that are Past Due
The interest for invoices paid too late is based on the payment transaction and calculated as follows:
For open, past due invoices, the interest is based on the invoice transaction and calculated as follows:
Interest from Invoice Date for Both Paid and Unpaid Past Due Invoices
The interest is calculated as soon as the invoice is past due, regardless of whether any payment has been made.
For paid invoices, the interest is calculated as follows:
For unpaid invoices:
Interest from Invoice Date for All Invoices
In some lines of business charging interest from the invoice date may be part of the company's payment terms. The customer is extended credit for a certain number of days. If the invoice is not paid within that time, the customer is liable for the interest from the purchase (invoice) date.
For example, a retail company offers a price on a specific product now – you do not have to pay before a certain date next year. However, if you do not pay before that date, interest will accrue from the date of the purchase.
The interest is calculated the same way as for calculation base 2 above.
Interest Invoicing Methods
When creating an interest rule, one of two interest invoicing methods is selected. These methods define whether only invoices paid too late will be included in the interest calculation or whether open invoices should be included as well.
The method defined for the interest rule is proposed when creating an interest invoice proposal in 'Interest Invoice. Open' (ARS160) but can be changed.
Interest on Partial Payments
Interest is also calculated for partial payments until the invoice is completely paid. When invoicing interest, the system keeps track of previously invoiced and paid amounts.
Additional Payment Reference
You can create a 'Parallel invoice number' for customer invoices. The rules for this are defined in
'Additional Payment Reference. Open' (CMS090). The only available 'Reference number type' is 1='Parallel invoice number'. The 'Parallel invoice number' can only be added to the XML when an invoice document is created. The 'Parallel invoice number' is saved in the FSAPRN table together with the invoice number.
Paid invoices can be excluded dependent on the number of days between payment date and interest invoice proposal date.