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Setup & Use Automatic Finance Charge

Introduction

If your firm has a policy to apply finance/interest charges on prior unpaid invoice balances at the time of generation of new invoice, CosmoLex’s automatic finance charge calculation function can be very useful. It is very important that you understand how finance charges are computed as calculations are complex and it is the lawyer’s duty to ensure any finance charges applied are consistent with their retainer agreement with clients.

Finance Charge Settings

Firm Settings

To implement finance charge, you must first ensure the function is turned on globally. These settings can be found under Setup > Firm Settings > Financial

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Calculate Finance Charge – check to enable finance charge calculations

If global setting for finance charge is ON, all new matters will have “Apply Finance Charge” flag ON. You can still override this on the matter level

Annual Interest Rate – Select the interest rate you wish to apply to past due balances

Finance Charge Type – You have the option of simple or compound interest.

  • Simple computes finance charge on total overdue amounts without including previous finance charges.
  • Compound computes finance charge on total overdue amounts including previous finance charges.

Grace Period – the number of days past the due date, before finance charges begins calculating

Threshold Finance Charge – the minimum amount of finance charge calculated before being added to an invoice.  Ex: if you set the threshold to $20, while finance charge will continue to calculate as usual, it will not be added to an invoice, until greater or equal to $20

  • If global setting for finance charge is ON, all new matters will have “Apply Finance Charge” flag ON. You can still selectively turn-off flags by editing the matter.

Matter Settings

When adding or editing a matter, in Advanced Settings you will see the same options as described in firm settings. The firm default will be applied automatically, but you can override each individual option, or turn off finance charge for this matter completely if you would like.

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Defining Variables

CosmoLex only computes finance charges when an invoice is being generated for the very first time. Once an invoice has been generated, if you make any changes to prior unpaid invoices, those changes will not be reflected in the finance charge calculated on the current invoice. You can always delete the invoice and recreate to capture finance changes again.

When you create an invoice, exact details of finance charge calculations can be seen by clicking on the icon next to finance charge section.

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While creating a new invoice, finance charges for EACH previously issued but unpaid invoice is computed as follows:

Due Date Including Grace Days

Overdue Amount

Total Overdue Days

Previously Billed Overdue Days

Current Overdue Days

New Finance Charge

Due Date Including Grace Days

  • Each invoice has a due date, but you are also to add grace days in your settings. This date takes both into account

Overdue Amount

  • If any prior invoice is partially paid, finance charge is only applied on the remaining balance which is the total overdue amount.

Total Overdue Days

  • Current Invoice date – (Previous Invoice Due Date + Allowed Grace Period)

Previously Billed Overdue Days

  • This same overdue invoice might have already been included in prior finance charge(s) calculations in prior invoices for part of the total overdue days:

Current Overdue Days

  • To be billed in the current invoice
  • Total overdue days – Previously Billed overdue day.

New Finance Charge

  • (Current Overdue Days /365) *(Annual Finance charge rate/100)

These calculations are repeated for each previously issued but unpaid invoice and the TOTAL finance charge is then applied. Again, please note, all these calculations are only performed when invoice is newly being created, if you make any changes to unpaid invoices, rate, etc, those changes will not be reflected in this calculation. However, you can manually click on “recompute” button to redo your finance charge calculations.

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Calculation Example

Assume 12% annual simple interest, grace period of 10 days.

  1. An invoice #1 of amount $1000 was generated on 1/1/2019 and was due on 2/1/2019.
  2. An invoice #2 of amount $2500 (new charge 1500, previous balance $1000) was generated on 2/1/2019
    1. No finance charge is applied as there is no overdue invoice as of 2/1/2019.
  3. An invoice # 3 is being generated on 3/1/2019
    1. $1000 of #1 will be applied finance charge for 18 days as it is 18 days past due after application of grace period. [3/1/2019-(2/1/2019 + 10 days}]
  4. An Invoice #4 is being generated on 4/1/2019.
    1. Invoice 1 and 2 balances will be applied with finance charge
    2. For invoice 1, only 31 days of finance charge is now applied. Total overdue days is 49 but 18 has already been billed earlier in #3.
    3. For invoice 2, 21 days of finance charge is applied.

Important Calculation Notes

  • Computation of finance charges is provided by CosmoLex as a convenience only. While we provide itemized details of how finance charges were computed, CosmoLex makes no warranty or representation, express of implied, that the finance charges computed are in compliance with applicable laws or rules of professional conduct. Compliance with such laws and rules are exclusively the responsibility of the user of the software.
  • Finance charge is only computed at the time of invoice generation based on the overdue amounts and overdue days as well as what has already been billed along with interest settings at the time of invoice creation. All computations are localized along with the invoice and do not automatically update no matter what is done to previous invoices based on which these amounts are based. Subsequently, on edit, it does not change as balances are a dynamic number. If changes were made in “previous invoices”. However, you can manually click on “recompute” button to redo your finance charge calculations.
  • If user has operating or trust retainers (unapplied payments) as well as overdue amounts, they should apply unapplied payments to previous invoices first. Else, finance charge would be computed on higher overdue amounts.
  • For a matter, do not switch from manual finance charges on earlier invoices to an automatic finance charges on future invoices. This situation arises commonly when new customers migrate to CosmoLex along with their prior invoices. If you make the switch, CosmoLex will compute finance charges on ALL prior invoices as it will not find any “Previously Billed Overdue Days” (even though you might have included the charges using manual calculations). This will result into excessive finance charges applied. It is best to not use automatic calculations for such matters.
Updated on June 21, 2019

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