The payment schedule of financial instruments defines the dates at which payments are made by one party to another on for example a bond or derivative.
It can be either customized or parameterized and is an essential part of any contract relating to such instruments.
Payment schedules can also be included in, say, a lease contract as well as other agreements that involve regular payments between two parties.
The following article provides examples of payment schedules related to different types of financial instruments and explains how they work.
What is the Payment Schedule?
A payment schedule is a time management schedule or timetable in which payments are to be made to a creditor.
Some payment schedules refer to work where the employees are the creditors having done work for the company during a duration of time.
Others refer to timed payments made in connection with a contract or agreement, such as monthly car-lease payments. You have to know the easy ways to accept the payments from the clients to create effective payment schedules.
A payment schedule is an essential part of any agreement between two parties where payment has to be made by one party to another regularly for example monthly rent payment, weekly salary payment, etc
Financial instruments are also traded in different settlement systems with payment schedules being included as integral parts of the trade contract, for example when you buy or sell a bond.
Why do you need a Payment Schedule?
For jobs involving projects or long-term services, milestone payments outlined in a payment schedule are requested by contractors for the services rendered. Commonly, here are the reasons why a payment or salary schedule is needed:
Payment schedules guarantee some form of payment even if a project gets ditched or stopped. Milestone payments ensure that you are paid for the work you have billed per predetermined schedule or milestone event.
The cash flow statement for the business is controlled as billing for services rendered is updated after every milestone event.
Investors in bonds and derivatives pay a fee to exchange money today against payment of interest (and/or repayment) in the future when an underlying financial instrument reaches a milestone.
Payment schedules help to determine if a client is a non-payer. Having to continue doing the project where you would not be paid does not make sense and detecting this early on is vital for every project that you take.
It can be a good idea to develop a payment schedule for your clients as you can include easily understandable descriptions of payments.
This way it will be easier for the client to understand the basis of payments and this will prevent any misunderstandings or confusion in the future.
How is the Payment Schedule structured?
A customer invoices with milestones where one invoice per milestone is issued. An invoice per service, with a payment schedule containing accurate information on how much the client owes you.
If you are deciding to use type 1, it may be a good idea to provide the exact dates of payment in your invoice as this will ensure that there is no confusion.
Some companies use the 80/20 rule, where they issue an invoice containing milestones. However, it is vital to remember that this type of structure offers no safety for you.
This means that your customer can claim that there was not enough work done for their money or that the project was stopped mid-way through etc.
This is why some companies choose to use the second option of an invoice per service, with the payment schedule. With this type, you can include detailed descriptions of services rendered along with the exact amount of money that is owed by your client.
As the customer pays for the work done, they will see exactly what they are paying for and there can be no confusion as to what the client owes you.
What should a Payment Schedule contain?
A payment schedule can be presented in both written and diagrammatic format. The information to include depends on which type of schedule is being used, but generally, the main points that need to be included are:
For either or both types mentioned above:
- The date or dates on which the customer is expected to make payment for services rendered.
- The amount is due by the customer on each payment date.
- The number of payments to be made, if applicable.
- Details of any interest, fees, etc that will be charged by the business upon non-payment or late payment.
- You must check your payment schedule once you have sent it to your client as any errors can lead to misunderstandings later.
When do you need a Payment Schedule?
It is important to know when you would require the payment schedule for the services that your business provides.
You may also seek assistance on how best to profitably manage your resources (time, money, etc). Some cases where a payment schedule may be required are:
Construction projects where progress payments are allowed throughout the construction process.
Financial services such as a company leasing out its equipment to another company and allowing regular payments for the times that it has used the equipment.
Ordinary businesses where progress payments for completed projects etc may be required. A client could ask you to bill him at intervals, say monthly or bi-monthly, and you can refer to your payment schedule for this arrangement.
What are the Different Types of Payment Schedules?
Depending on the types of financial instruments involved, there could be different types of payment schedules.
For example when trading bonds, you would follow a fixed schedule where each coupon payment is made at predetermined dates following its principal payments in which case payments are usually made once in six months.
Other financial instruments follow the same payment schedule, so if you trade them during their maturity date, you would be required to make all your payments following that schedule.
But when it comes to derivatives (such as options or warrants), there is neither a final repayment of premium nor any interest rate involved; instead what you pay initially when entering into a deal is called premium and you would make payments at different points throughout the trade to compensate for such.
What Payment schedule examples are there?
In financial markets, payment schedules can refer to different types of transactions and instruments: corporate bonds payment schedule, interest rate swaps payment schedule, etc.
In this article, we will take a closer look at some relatively common payment schedules related to trading in various financial instruments as well as leases and other agreements.
1. Pay in full
This payment schedule is most commonly used when the invoiced party will pay for the product or service either immediately after receiving it, or at some point down the road.
It's also common with services that are provided on a one-time basis and don't require any ongoing maintenance.
Schedule examples like staff schedule examples shown on the page may inspire and add knowledge in the making of a payment schedule.
By paying full, you can also reduce any disputed invoice and enable payment by cash or check.
For example, if someone buys a new car and the payment schedule for this transaction is "pay in full," they will make one payment to cover both the price of the car and any taxes or fees that are associated with purchasing it.
2. Fixed Deposit payment
This payment schedule is popular with event industries and others who always collect the same deposit amount, no matter what the final invoice total will be.
The payment itself occurs when a fixed sum of money is deposited at regular intervals for an agreed-upon period (for example six months).
This payment plan is usually made by someone who is looking to book the services of a band or other performer without paying for them upfront.
A fixed deposit payment schedule shows that the two parties to a contract or agreement will divide up work that must be done into smaller pieces and each party will contribute in its unique way.
3. Two equal Payments
One of the most popular payment schedules and can be used in a variety of industries. In this payment schedule:
50% will be due when the client signs the contract 50% will be due on the project end date.
This payment plan is often chosen by those who are using financial instruments to fund a major purchase and want to make the payment process as simple as possible.
It's also common when a service provider charges an up-front fee for their services, such as when they're selling shares in a project or other investment vehicle.
4. Three equal payments
This payment schedule is often used by those who want to pay for a purchase over time, but don't have the funds available upfront. In this payment schedule:
34% will be due immediately 33% will be due one month later 33% will be due one month after that
To make calculating payments as straightforward as possible, it's common for payment schedules like this one to use percentage amounts that add up to 100%.
This payment plan is most commonly used when the invoiced party will be paying for a product or service over time but doesn't require any ongoing maintenance.
For example, if someone buys a new car and the payment schedule for this transaction is "three equal payments," they will make one payment to cover all of the taxes or fees that are associated with purchasing it.
5. Six monthly fixed payments
This payment schedule is a good option to consider when there are five or more payments, but you may still prefer to use one invoice with the payment schedule.
This type of payment plan often features invoices that are generated on the same date every month and due dates for payment in between those days (such as the first of the month and the fifteenth).
This payment plan is most commonly used for regular invoices that don't have a specific payment schedule associated with them.
For example, if someone has a monthly consulting arrangement or software subscription agreement that includes payment schedules like this one, they will receive an invoice each time payment is due.
It's difficult to divide 100% into six roughly equal whole numbers, so in this scenario, we are using fixed amounts instead of percentages.
This means that you'll need to know the invoice total ahead of time (including tax), and set payment dates accordingly so they cover the entire amount due. You would only use a payment schedule like this on invoices with that specific total.
6. Monthly payment schedule
This payment schedule is usually agreed upon between the lessor and lessee of the vehicle. The payment schedule for this kind of payment agreement specifies when payments are to be made, the number of payments or duration, etc.
This type of payment schedule might be associated with homeowners, but it is not the only one used.
The monthly payment schedule calculates the amount that should be paid to discharge a liability (e.g., mortgage).
This type of payment schedule can also include other details such as down payment amount, which payment is calculated first, payment frequency, etc.
The payment schedule examples provided in the article can be used as a reference point when creating your payment schedules.
7. Derivatives payment schedule
A payment schedule for a derivative contract refers to the time management of cash flows between two parties, where one party pays another on regular basis.
It can also include dates and conditions for physical settlement or netting (i.e., offsetting).
Derivative payment schedule calculations are included in the calculation of daily net exposure. It is important to note that the sum of these cash flows should not include any credit or debit interest payments.
It is also important to note that the amount of each cash flow in a derivative payment schedule is equal.
8. Bond payment schedule
If you buy a bond, you will be entitled to payment of coupon and repayment of the nominal value at maturity.
The payment schedule is an integral part of any trade contract involving bonds and can be customized or made parameterized for your particular needs (e.g., every six months).
Bond payments schedules refer to the management of cash flows associated with a bond and payment schedule. It is important to note that the sum of all cash flows should not include any credit or debit interest payments.
This type of payment schedule doesn't include termination or expiration dates, as those details are often negotiated as part of the larger trade agreement, such as a bond purchase contract.
9. Interest rate swaps payment schedule
In this case, the payment schedules define the dates at which you will be entitled to receive or make payments as a result of an interest swap agreement.
They are usually customized and made parameterized for your particular needs (e.g., monthly). It is important to note that the sum of these cash flows should not include any credit or debit interest payments.
Since this type of payment schedule doesn't include termination or expiration dates, it is often included in the contract that governs the swap agreement itself.
10. Lease payment schedule
There are several different types of payment schedules used in connection with leases. The payment schedule can include payment of rent as well as other costs such as utilities and insurance etc.
Pay schedules determine how often you pay employees and/or contractors. Many states have payment schedule frequency requirements for employers, which can be dependent on the size of the company and the industry.
Financial instruments are also traded in different settlement systems with payment schedules being included as integral parts of a trade contract, for example when you buy or sell a bond.
11. Quarterly payment schedule
This type of payment schedule might be associated with business and corporate entities, but it is not the only one used.
A quarterly payment schedule calculates the amount that should be paid to discharge a liability (e.g., mortgage).
If your company's business model is associated with quarterly payment schedules, you're likely to have invoices for each period. In that case, keep an eye out for the discount type and coupon date when entering the invoice into Xero to ensure you get paid on time (see our article here ).
12. Annual payment schedule
An annual payment schedule calculates the amount that should be paid to discharge a liability (e.g., loan). This type of payment schedule can vary depending on your business and personal needs (i.e., monthly, quarterly, and annually).
The annual payment schedule is essential when you create your payment schedule template for invoices because it sets the expectations with your clients about how often they should be paying you.
13. Payment schedule multiplier
This type of payment schedule is used to calculate the interest owed on a loan or credit card balance based on the relevant daily interest rate, number of days in the period, and the principal amount.
For example, if your client wants to pay you annually, but you want weekly payments — then this coupon would be applied to each payment they make.
14. Payment schedule indexer
This type of payment schedule is a rate that is used to adjust the basis point value of an existing coupon or discount rate throughout a particular period.
The most common applications are where coupons change at regular intervals but not on predetermined dates e.g., semi-annual interest rates.
15. Payment schedule percentage of the value
This type of payment schedule is mainly used by professional accruals and accounts payable specialists to allocate interest expenses in periods where they are recorded.
In case you're wondering what this means, it is where interest expenses might be allocated differently than how your creditor records them.
For example, if you're due to pay your annual interest payment before the creditor has allocated the amount of accrued interest, you might want to apply a percentage off your invoice.
Pros and Cons of Different Types of Payment Schedules
Different types of payment schedules have different advantages and disadvantages. We've narrowed these down to the most common payment schedules used in business today:
Retainage is paid in a lump sum after all services are completed. For example, if you're a contractor building an extension, your client would pay you half before the work starts and the other half after the project is complete.
Retainage can be beneficial for both parties as it ensures a large proportion of your fee is paid on the commencement of a project, allowing you to cover all initial expenses before starting a job.
The biggest disadvantage of this type of payment schedule is that if something goes wrong with a project, it can be difficult to recover a retained payment.
This type of payment schedule is only suitable for contracts involving construction or installation going over one specific period. If the work required is ongoing or permanent, you should consider another payment schedule.
Retainage schedules are popular with construction companies and certain invoices will have this payment schedule type automatically applied.
Double-entry invoices are processed by the software one at a time, with each invoice standing alone. This means you can't bundle two or more invoices into one payment unless they're related to each other (e.g., for items that are part of the same order).
What is the difference between the Payment Schedule and Invoice?
Although payment schedules and invoices are both financial papers that provide information on the services rendered, they differ in terms of how frequently they need to be made.
The payment schedule is the detailed account of your business transaction which includes dates, items, subtotal, and taxes.
An invoice is a statement of work or purchase that has not yet been paid for by the buyer. It outlines the cost of goods/services you offer including taxes and any shipping fees.
It's important to know that one invoice can have more than one payment schedule. Payment schedules are useful for re-occurring expenses such as equipment leases or insurance policies.
You may often need to change your payment schedule as business conditions require it. You can do this by going to Settings on the sidebar and clicking "Edit Payment Schedules" at the bottom of the left navigation pane.
The payment schedule examples shown above may inspire and add knowledge in the making of a payment schedule.
With our busy lives, managing the payment of bills is as important as taking your next meal. Missing one would mean penalties and other payments. The following should help in managing those payments:
- Make a list of all your payment
- Organize payment by due dates
- Calculate total payment and divide by two separate payments
- Decide on at least two days in a month to schedule payment
This article has given an overview of payment schedules and how they work, we hope that this information will help you to create a payment plan for your purposes or projects!