Many of our clients that use the “Finance Charge/Interest”  feature in Timeslips have found it confusing. We have been asked for advice about Timeslips interest calculations on several occasions.  It took me a while to completely understand how it works myself, so I figured it was a good topic to discuss in this space.  The new and improved Billing Assistant in Timeslips 2010 gives a much clearer breakdown of how interest charges are calculated, but I will attempt to clarify it a little further.   

First let’s look at the initial interest setup.  Interest is configured for each client on the Arrangement 2 page, where there are five fields that relate to interest:

Annual Interest Rate.  This is typically set to 18%, which equates to 1.5% per month or .049315% per day.  Despite the fact that you are choosing an annual interest rate here, interest is actually calculated by the day.  This is an important point to remember. 

Type of Interest.  You can choose Simple or Compound.  Simple means that interest is only charged on the original invoice amount.  Compound means that interest is charged on the interest.  Once this is set and an invoice is generated, it cannot be changed for that invoice. 

Charge Interest At.  The choices here are determined by how you’ve configured your aging periods.  Typically this will be 30, 60, 90 and 120 (in days).   Interest will begin calculating after the number of days you select here. 

Grace Period.  This tends to be the most confusing field.  The choices on the dropdown menu are also determined by how you’ve configured your aging periods, but here you can type in a value that’s not on the list.  This number represents how many days NOT to charge interest for.  For example, let’s say you generated a bill on 9/30 and have interest set to charge at 30 days.  A month has gone by and the client has not paid, and now it’s time to generate the October bills on 10/31.  31 days have gone by since the first bill went out on 9/30.  If you have set the grace period to 0, 31 days worth of interest will be charged.  If you set a grace period of 5 days, only 26 days of interest would be charged.  If you set a grace period of 30 days, only one day of interest would be charged.  If you look at the Days Due/Days Per Year calculation in the Billing Assistant you will see that the grace period essentially moves the original invoice date later by the specified number of days.  In this example, with the grace period set to 5 days, it shows the original invoice date as 10/5, even though the bill was actually created on 9/30. 

Last Bill Date.  This field should only be filled in if you are setting up a client that you have already billed outside of Timeslips.  Each time you generate a bill through Timeslips this field will be automatically updated to reflect the date of the last bill.   

 Let’s continue to follow the previous example through a little further, to see how the interest charges would be affected in subsequent months if the client still hadn’t paid anything (not that we ever have these kinds of clients ourselves).   We’ll use compound interest for this example. 

On 9/30 we generated a bill for $1000 in fees. 

On 10/31 we billed another $1000 in fees, but added on $12.82 in interest from the previous bill:

           $1000.00 from 9/30 invoice
x                 26 days overdue (31 actual days minus the 5 day grace period)
 x   0.00049315 daily interest rate
               $12.82

So the total amount of the new bill is $1012.82. 

 On 11/30 the first bill (from 9/30) has now accumulated another 30 days of interest.  The grace period is no longer in play for that invoice so the calculation would be as follows:

          $1000.00 from 9/30 invoice
x                 30 days since the last invoice
x   0.00049315 daily interest rate
             $14.79

The grace period is still in play for the 10/31 invoice since this is the first time we are charging interest on it.  The calculation would be as follows:  Note: If we were using simple interest we would charge interest on only $1000 from the 10/31 invoice and not the $12.82 in interest. 

       $1012.82 from 10/31 invoice
x                 25 days overdue (30 actual days minus the 5 day grace period)
x  0.00049315 daily interest rate
           $12.49

So the total interest charged on 11/30 comes to $27.28.  

 Hopefully this will help you to decide how you want to handle charging interest and how to explain the charges to your clients when they inevitably ask you to explain how you came up with the amounts. 

 Discount pricing is still available for Timeslips 2010 upgrades until the end of the year.  Timeslips versions 2007 and below are no longer supported by Sage software.   And interest charges are a whole lot easier to figure out and manage in Timeslips 2010!