Selling on instalment plans without spreadsheets

One sale, many collections

A customer buys a machine for a down payment and twelve monthly payments. The sale happens once. The collection happens thirteen times. Most of the trouble businesses have with instalment selling comes from mixing those two things up.

When the plan lives in a spreadsheet beside the accounts, the two drift apart. A payment is recorded in the books but not in the sheet. The sheet says instalment four is overdue while the customer statement says the balance is lower than expected. Reminders go out for money that has already arrived. This guide sets out a cleaner model.

Three ways it commonly goes wrong

• One invoice per instalment. Revenue and tax are spread over the year instead of recognised when the goods were supplied, stock movements no longer match invoices, and the customer receives thirteen tax documents for one purchase.
• Recurring invoices. Recurring invoicing is built for repeated supplies, such as rent, subscriptions or maintenance contracts. Using it to collect a single sale creates the same problem as one invoice per instalment.
• A side spreadsheet. The invoice is correct, but due dates, amounts paid and overdue status live outside the books, so ageing, reminders and cash forecasts ignore the plan.

The cleaner model: book once, schedule the receivable

Record one invoice for the full amount on the date of sale, with tax calculated in the usual way. The journal is the same as any credit sale: the full amount goes to receivables. Then attach a schedule that says how that receivable will be collected.

The schedule is not a set of documents. It is a plan for one balance. That keeps revenue, tax and stock exactly where they belong, and puts the instalment detail where collections need it.

Tax rules for deferred-payment sales vary by country, so confirm the treatment with your adviser, particularly for any finance charge.

Designing the schedule

A practical plan needs only a few inputs:

• Down payment, collected at the time of sale;
• number of instalments, such as 6 or 12;
• frequency, usually monthly or quarterly;
• first due date;
• an optional finance charge, either a fixed amount or a percentage of the financed amount.

Split the financed amount evenly and put any rounding difference on the last instalment, so the first payments are round numbers. Take care with month ends: an instalment due on the 31st has to fall on the last day of shorter months. Above all, the schedule must add up to the invoice total exactly, to the smallest currency unit. A schedule that is a few cents out will leave a balance nobody can explain.

Treat the finance charge as its own line

If you charge for the credit, show it as a separate line on the same invoice and post it to a finance income account, not to sales. Your sales figures and margins then reflect the goods, and the finance income shows what the credit is earning. Whether the finance charge carries sales tax or VAT, and at what rate, depends on the jurisdiction and how the sale is structured; set it with your accountant rather than assuming.

Collecting against the plan

When money arrives, apply it to the oldest unpaid instalment first. A payment that covers one and a half instalments pays the first in full and the second in part. Each instalment then has a clear status:

• Paid: fully settled;
• Partial: part paid, not yet past due;
• Due: not paid, due date not yet passed;
• Overdue: past its due date and not fully paid.

Reminders should chase only instalments that are actually past due. Reminding a customer about the whole outstanding balance, most of which is not yet due, damages a relationship you are financing for a year.

Reporting that understands the plan

Receivables ageing is where side spreadsheets cause the most damage. An invoice dated in January with instalments running to December is not "300 days overdue" in October; most of it is not due yet. Ageing and cash-flow forecasts should use each instalment's due date. Then the ageing report shows real arrears, and the forecast shows when cash is actually expected.

Customer statements should show the schedule as well: each instalment, its due date, amount, amount paid and status. That one table answers most customer questions before they are asked.

Edits, returns and buying on instalments

When an invoice on a plan is edited, re-plan only the unpaid part. Instalments already paid should stay as they are. If an edit would leave the customer having paid more than the new total, the right tool is a credit note, not a silent change. Cancelling the invoice should remove the plan with it.

The same model works in reverse. When you buy equipment from a supplier on instalments, record one bill for the full amount and attach a payment schedule, with any supplier finance charge posted to a finance cost account. Payables ageing and the cash-flow forecast then show what you owe, and when.

How NAQIX handles instalment plans

In NAQIX, an invoice can be marked Sell on instalments and a supplier bill Bought on instalments. Both use the same plan editor.

• The document is recorded once for the full amount; the plan only schedules collection or payment.
• The plan takes a down payment, 1 to 60 instalments, monthly or quarterly frequency, a first due date and an optional finance charge. The schedule can be generated or edited by hand, and must equal the document total before it can be saved.
• The finance charge is a separate line, posted to Finance Income on sales and Finance Cost on purchases. Its tax rate is a company setting that you choose.
• Payments are applied to the oldest instalment first, and each instalment shows paid, partial, due or overdue.
• Customer and supplier ageing, the payables due list and the cash-flow forecast use instalment dates. An Instalments due page lists what is overdue and upcoming, and customer and supplier statements show the schedule.
• Reminders cover past-due instalments in the owner digest; customers are emailed only when someone chooses to send it.

For genuinely repeating charges, NAQIX's recurring invoices are generated automatically on your company's calendar, and each company can opt out. See the Sales & billing and Purchasing pages.