Linda's former colleague, D'Angelo, has been working for Dream House, a real estate company that has recently marketed new services to its clients, such as housekeeping, garden maintenance and laundry. Billing for these services has created new needs at Dream House.
Chan and Maria from Dream House's Finance department ask D'Angelo what proration methods are possible when a service does not fully cover a billing period. For example, for the December invoice, housekeeping, which usually takes place every day, was stopped from December 25 to 31. D'Angelo offers two solutions: the commercial year or the calendar year.
Definition and use case
The choice is yours, but some industries have a more appropriate calculation method than others. In any case, when you make prorations, it is important to mention it to your customers so that they can understand their invoice.
Commercial year
When calculating in this way, the number of days per month is set to 30 by default. The commercial year therefore has 360 days.
In particular, you can use this if the number of days per month does not play a role in your billing, i.e. you do not have to bill on an real day basis.
Advantages:
The calculation is easier to do and is the same regardless of the month or year (leap year or not).
You divide by 30 even the months of 31 days, overpricing on these months to the disadvantage of the client.
Disadvantages:
The client may not understand why they have to pay a full monthly payment on a 31-day month even though the service only lasted 30 days.
Calendar year
The calendar year is based on the actual days of the year. The exact number of days is taken into account, for example 31 days for January, 28 or 29 for February. That is 365 days for a normal year and 366 for a leap year.
Use this prorating method:
- If you are billing for a monthly service and the exact number of days counts when prorating, such as:
Nights spent on vacation rentals.
Days spent renting a car.
- or if you bill by consumption:
A phone plan.
A music streaming package.
Advantages:
The prorating is clear for the customer, you bill for the days actually consumed.
Disadvantages:
Each month and year, the calculation is done differently and the amount billed is different. For example, an invoice of 27 days for a telephone package at 30€ per month will not have the same price in February as in August.
Modification of the proration method on the Administration tab
If the calculation in commercial year is more adapted to your business needs, you don't have to do anything because this method is selected by default in the Administration tab.
If the calendar year calculation is more adapted to your business needs, please follow these steps.
Steps
2. By default, the box Activate commercial year is checked.
3. If you want to switch to calendar year calculation, you have to uncheck the box.
Consequences on the proration
In order to calculate the prorating on your invoice line items, you can read the instructions in this article: Automatic prorating.
Let's take the example of a subscription on which we configure these Recurrence Options:
And these Quantities & Amounts of the subscription line item:
Keeping the Calculation in commercial year, we get this result on the February 2020 invoice line items:
The calculation is done on a total period of 30 days, even if it is February.
Now let's see what we get for February 2020 if we choose the calendar year calculation:
By unchecking the option Activate commercial year in the Administration Frisbii tab,
And by generating the schedule again from the subscription.
The calculation is then made on a total period of 29 days. The prorata applied and the amount including VAT are calculated accordingly.
We can see:
When prorating the month of February, your customers will pay less in commercial year: they will pay X day(s) consumed during the month divided by 30 instead of dividing by 28 or 29 in the calendar year.
When prorating the month of December, your customers will pay more in commercial year: they will pay X days consumed in the month divided by 30 instead of dividing by 31 in the calendar year.
Here are more examples to make this reasoning even clearer.
Other examples
Let's say we have:
Monthly invoice on calendar months (January 1-31, February 1-28/29, etc.).
A subscription that ends on February 27 (not a leap year).
a) Calculating in a commercial year (360 days):
We will bill the customer 27/30 of the amount, so 360.00€.
b) In calendar year calculation (365 days):
We will invoice the customer 27/28 of the amount, so 385.72€.
Another subscription ends on August 30:
a) Calculating in a commercial year (360 days):
We will bill the customer 30/30 of the amount in august, so 400.00€.
b) In calendar year calculation (365 days):
We will bill the customer 30/31 of the amount in august, so 387.10€.
Chan and Maria from Dream House's sales department now know how to calculate with Frisbii.
As for D'Angelo, he has other functions to discover with the new version of Frisbii