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Best Practices for Finance Charges

Introduction

Finance charges are a tool used in accounting to manage overdue invoices. They can be applied to add interest to a balance, add service or late fees for transactions, or for balance transfer fees. This document is intended for accounting personnel who manage accounts receivable. Before implementing finance charges, it is crucial to decide on the frequency of their application (e.g., monthly) and the percentage to be charged.

Business Challenge

The primary business challenge is to effectively manage and collect on overdue customer balances. Without a systematic process for applying finance charges, businesses risk revenue loss from unpaid invoices and the administrative burden of inconsistent follow-up. A standardized approach ensures fairness and clarity for both the company and its customers.

Key Takeaways

• Establish a clear policy on the frequency and percentage of finance charges.
• Identify and exclude specific customers from the finance charge process if necessary.
• Utilize the system to automate the calculation and generation of finance charge invoices.
• Regularly review and process generated finance charge invoices.

Recommended Practice

The recommended practice is to implement a regular, systematic process for applying finance charges to overdue customer accounts. This involves setting up a standard finance charge percentage, defining what constitutes an overdue invoice (e.g., number of days past due), and establishing a minimum invoice total (threshold) for charges to apply.

Customers who should be exempt from these charges must be clearly marked in the system before the process is run. Once the parameters are set, the system can automatically identify all applicable invoices and generate new invoices for the calculated finance charges. These new invoices should then be reviewed, printed, and posted like any other standard invoice, ensuring that the revenue and accounts receivable are updated accordingly.

In Q360

To manage finance charges effectively within Q360, follow these steps:

Permissions:

Ensure the user has the FINCHARGE – view permission to access and use the Finance Charges form from the Accounts Receivable menu.

Disabling Finance Charges for a Customer:

1. Navigate to Accounting > Customer/Vendor.
2. Select the desired customer.
3. On the Cust/Vend tab, go to the Company sub-tab.
4. Check the Disable Finance Charges This must be done for any customer you wish to exclude before running the process.

Processing Finance Charges:

1. Navigate to Accounting > Accounts Receivable > Finance Charges.
2. The Finance Charges window will open. Define the following fields:
   • Company No.: Defaults to 01. Select the correct company if needed.
   • Start Cust No. / End Cust No.: Defaults to include all customers (000000 to ZZZZZZ). Adjust if you need to run charges for a specific range of customers.
   • # Days OverDue: Enter the number of days an invoice must be overdue to incur a finance charge. This is compared to the Due Date selected in this window.
   • Finance Percentage: Enter the percentage to be charged (e.g., 1.50 for 1.5%). This is used to calculate the charge based on the overdue invoice total.
   • Master No.: You can set up a specific Master (Type M) to track finance charge revenue. This allows for easier reporting. The Sales Revenue on this master should point to your designated Finance Charges GL account.
   • Due Date: Defaults to the current date. This is the date the finance charges are run.
   • Threshold: Enter the minimum invoice total required for finance charges to be applied. Invoices below this amount will be ignored.
3. Click Save. A confirmation prompt will appear. Click Yes to proceed.
4. Q360 will process the data and generate new invoices for the finance charges. The Invoices to Print form will open automatically.
5. In the Invoices to Print window, change the Type dropdown to FINANCE.
6. Click the refresh button to display all the newly generated finance charge invoices.
7. You can use the Zoom button to examine individual invoices. The invoice type will be set to FINANCE, and the description will indicate it is a “Finance Charge on Overdue Account”.
8. Select the invoices you wish to process by checking the box in the Sel
9. Proceed with printing and posting these invoices as you would with any regular invoice. Once posted, the invoice will create the corresponding AR journal entries, debiting Accounts Receivable and crediting the revenue account specified in your Master setup.

Frequently Asked Questions

How is the finance charge calculated?

The finance charge is calculated by multiplying the total of the overdue invoice by the Finance Percentage entered in the Finance Charges window (Finance Percentage * Invoice Total).

Can I set up a unique master for tracking finance charges?

Yes, it is recommended to set up a unique Master with a Master Type of ‘M’. The sales revenue account for this master should be the GL account designated for Finance Charges revenue. This makes it easier to find and report on these specific transactions.

What happens after I click save on the Finance Charges window?

After you click Save and confirm, Q360 creates un-posted invoices of the type ‘FINANCE’ for all customers who meet the criteria you defined. It then automatically opens the ‘Invoices to Print’ window for you to review and process them.

For detailed instruction for Finance Charge setup in Q360, see Invoice Finance Charges