Note 18: Non-recurring charges billed by Instalment

Posted: 08 July 2006

Note: Instalment / installment are alternative spellings.

Instalment collections

Some non-recurring charges are substantial and impart a substantial cash flow impact on a biller's customers. To assist customers with their cash flow (i.e. bill payments), a biller may choose to spread a large charge over a defined time period. This can be done in two ways - by charging instalments of the charge on separate, sequential bills, or by billing the full amount 'up front' but only expecting payment of the debt in instalments aligned with staggered 'due dates'.

Charging instalments on sequential bills: Where an installation or equipment charge is large, it can be made payable over some period using monthly billed amounts. Billers who can instalment bill a customer's setup charges may use this flexibility as a bargaining point to win customers who might otherwise find it difficult to fund a large payment up-front. Customers can fund the smaller instalment amounts billed on sequential bills from their income generated over the agreed payment period.

Alternatively, when a customer incurs many smaller charges at the same time (e.g. installation charges for hundreds of new phone installations (that aggregate to a large, up-front total)), the biller can spread the billing of the aggregate amount over time by instalment billing each smaller charge across sequential bills.

Billing up front with staggered due dates: The alternative approach to billing large charges gradually is to bill the full amount up-front, but stagger the expectation of when the debt becomes collectable. Non-payment by the due dates allows immediate invocation of Credit Management actions to recover the outstanding amount.

An example of this approach is a local government that bills property owners the full amount of their Rates (or Tax) up-front, but allows them to pay their outstanding debt in quarterly instalments. This approach provides the local government with a collectable debt, and the property owners with known future payments on defined 'due dates'.

Instalment variations

Whether billing is performed using separate instalments or staggered payments, there are no inherent restrictions on how, or over what period, the original charge amounts are apportioned. Whilst evenly divided instalments are easy to calculate, uneven amounts may align with the customer's income stream, support negotiated contract terms, or allow marketing-based differentiation (e.g. low upfront payments, pay the balance later...).

Breaking a charge into instalments can have other financial implications. The biller's decision to delay collecting the full amount establishes a 'payment plan' between the biller and customer with financial implications that can include:

Taxation: Governments' taxation departments can be less concerned by the biller / customer benefits that flow from an instalment arrangement and more focused on the impact the transaction's total amount will have on tax liabilities. For example, the Australia Tax Office expects the full 'Goods and Services Tax' (a value-add tax) to be paid up-front based on the entire charge amount, and not as and when each instalment is levied. This approach impacts the billing system which must bill and collect the full tax amount from customers 'up front' (to avoid billers providing (short-term) funding of the tax liability on the customer's behalf).
Interest fees / Higher prices: Billers may levy interest or charge slightly more for amounts that are instalment billed to reflect the impact on the biller's own cash flow, where the biller's creditors must be paid before all instalments are collected. (Billers being disinclined to act as a cheap source of funding for their customers.)

Early termination of Instalment processing

If the relationship between the customer and biller is canceled before the full (instalment billed) amount has been paid, the biller must decide how to treat the outstanding instalments. Cancellation of an instalment arrangement may occur when the billing relationship sours, or occur in the context of friendly renegotiation when the relationship between the biller and customer is ongoing and healthy. Alternatives include:

Forgive the amount outstanding: This may be used when the early cancellation is at the biller's request (and not due to a customer's unpaid bills). A commercial decision by the biller to forgive the remaining instalment amounts may be made where the customer is making substantial additional or replacement purchases. Forgiving the remaining instalments will have financial implications, especially in the area of taxation, since the original non-recurring charge is now reduced.
Pay the amount outstanding (immediately): The non-recurring charge has been incurred and the biller immediately asks that the remaining amount be paid (i.e. cancels the 'payment plan'). This approach is pertinent for third-party charges where the biller is liable to pay the full amount to another business. A demand for immediate payment can also be invoked when a customer terminates their relationship with the biller, or the customer has not paid his bills. Demanding the full amount formalises the total debt to be collected.

Tags: Billing, Instalment, Installment, Non Recurring