Charging Interest and Penalties for Past Due Trade Receivables

Accounting policies regarding past due trade receivables can vary significantly among major corporations, depending on such variables as an industry, geographic location ^[1], and government regulation. In addition to the primary decision as to whether interest and/or penalties should even be charged, are the specifics surrounding such issues as the criteria utilized to determine which accounts are charged interest or penalties, what interest rate percentage is utilized, who within the company has the authority to waive these charges, and to what degree they will be collected if the receivable evolves into a bad debt status.  In addition, consideration needs to be given to how the calculation and application of interest and penalties to accounts will be accomplished, both from a system and process standpoint.

Recently, a poll was administered to the members of Peeriosity’s Accounts Receivable research area ^[2] utilizing Peeriosity’s iPolling^TM technology.  This poll consisted of two questions, with the first one addressing the status of the surveyed companies of charging interest and/or penalties for past due trade receivables.  Looking at the results, a significant majority (65%) do not charge interest or penalties under these circumstances.  Of the remaining 35% of companies that do assess these charges, 17% consistently charge interest across their entire account base on a monthly basis for all past due periods ^[3], while 6% only do so on select past due accounts.  An additional 6% charge interest on an ad hoc basis on those accounts that are significantly past due, while 6% do not charge interest, but instead assess penalties to their late accounts.

The second iPolling^TM question then looked how at the charges are administered at the companies that do charge interest and/or penalties on past due trade receivables.  Interestingly, just 43% of the companies have automated the calculation and assessment of both the interest and penalty.  Of the remaining 57% of the companies, 14% have automated the calculation and billing of the interest, but the penalty assessment is performed separately on a manual basis.  And most surprising, for 43% of the companies, the entire calculation and assessment of both interest and penalty are completely manual.  There certainly appears to be an opportunity for improvement via automation for those major corporations that continue to perform these processes manually.

When did your company last review its policy regarding the assessment of interest and penalties for past due receivables?  Is the infrastructure currently in place to effectively administer this type of activity?

Who are your peers and how are you collaborating with them?

“iPolling^TM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer Mail^TM, members can easily communicate at any time with others who participated in iPolling.