Payment Terms for Sales and Purchase Contracts
Payment terms define how every document (invoice) produced must be paid. Payment terms specify the due amounts on an invoice for a selected invoice iteration type, credit note or debit note, as well as the timing of payments of any cash discounts and taxes.
Payment terms can be configured for sales and purchase contracts or for payable analytes within those contracts.
When defining the payment terms of sales and purchase contracts, a calendar can be associated with the payment terms to define what the business days are for calculating when the invoice should be issued.
Example:
- Provisional payment: 95% CAD (cash against document)
- Second provisional: Balance 60 days after arrival
- Final payment: Invoiced as soon as all facts are known (for example, assays or prices)
- Payment due within 5 business days
Example:
- Provisional payment: 90% 15th day MAMS (month after month of shipment)
After the total price of a payment is determined in terms of the payable content, the issue date terms define the invoice iteration types that are to be created, when they should be issued, and how much of the total should be due for payment.
If payments are due, payable percentages are specified to determine the payable portion of the invoice or invoice iteration. Often with provisional invoices, or when there are products like base metals that need assay exchanges, the full amount of the invoice is not always asked for, but perhaps only 90%, and then the final invoice will have 100% payable after all the final values of the assay exchange are known. When the seller and buyer assay values are known, and any kind of settlement rules have been applied, the final values to be paid, in a specific currency, are known.
Invoices are issued according to the reference date defined for the invoice in the issue date terms. This date is determined based on a specified date relative to the sales process, plus a defined or calculated number of days.
Instalments
Instalments effectively divide the payment into components (the total amount, tax amount or net amount) and determine the due date of the invoices.
Example: Invoice due 30 days after the bill of lading date on 1 August. Even if the user only issues the invoice on 4 August, the due date of the invoice (that is, when it needs to be paid by) is 30 August.
Example: A first instalment may ask for the 100% of the tax amount to be paid, due in 5 days using a specific calendar, calculated from the bill of lading date. A second instalment may then ask for 100% of the net amount within 10 days.
At least one instalment has to be defined if payment is to be asked for on the invoice. Sometimes invoices are created only for the company's internal records, that is, they are printed but not sent to the client.
The amount of credit available to an organisation or company, also known as the credit line exposure, is calculated as:
Approved Credit + Unallocated Payments - Outstanding Amount on Instalments
Unallocated payments refer to payments entered into the system, where the available balance has not been fully allocated. (Payments can be associated with a letter of credit.) Therefore, whenever a modification is made to the credit limit itself affecting the limit amount or currency, or when instalment line items are changed (and the invoice despatch total they belong to is locked), or when any changes are made to a payment's available balance, the available credit is recalculated.
Payment Conditions
Payment conditions allow for the calculation of discounts for early payment of invoices, or penalties for payments that are outstanding beyond a certain date, based upon given conditions. They are related to the payment amounts and apply to all instalments per invoice iteration type. This discount or penalty can be applied based on a fixed amount or percentage owing, or on a percentage derived from a selected interest rate series. The percentage rate returned from the interest rate series can have a spread added to smooth rate fluctuations. Because percentage rates are usually stored per annum, the basis (days) is used to define the number of days in this period, returning a daily interest rate. This resulting percentage is then multiplied by the cash discount method, and adjusted for the relevant period. This relevant period is determined as the number of days from the due date on the instalment to the payment condition date. In summary:
(Value or Interest Rate + Spread) * (Instalment Due Date - Payment Condition Date) / Basis (Days)
Example: A provisional invoice has an instalment due date of the invoice date plus 21 days. If payment is received early, a discount based on a fixed interest rate is applied to the next invoice. The payment condition is set up as a discount on the final invoice, and is based on a cash discount method of PIP. In this scenario, the number of days for the interest calculation is the payment's allocation date minus the payment condition date.
Example: An invoice has an instalment due date of the invoice date plus 7 days. A payment condition is set up as a discount for a pre-agreed on-time payment, based on an interest rate series and a cash discount method of CIV. The payment condition date is the bill of lading date plus 50 days. If the invoice is raised on the bill of lading date, the discount is calculated on 43 days.
Payable Percentage Overrides
The payable percentage specified for a payment term can be overridden for selected dynamic invoice item types.
