Methodology
Late Payment Cost Planner methodology
Educational only: Business decision support, not accounting, tax or legal advice.
Privacy: Calculations run locally; Margin101 does not receive your commercial inputs.
Update policy: Reviewed when formulas or official dependencies change.
Scope: Market-neutral small-business planning using your own assumptions.
1. Formulas and units
fundingCost = invoiceAmount × annualFundingRate × daysLate ÷ periodDaysWhere
- invoiceAmount
- Invoice amount (currency units/invoice face value on the selected tax basis)Source: Business record
- daysLate
- Days late (calendar days after the contractual invoice due date)Source: Business record
- annualFundingRate
- Annual funding rate (decimal annual funding-cost rate applied to the overdue invoice (1 = 100%))Source: Business record
- periodDays
- Day-count basis (whole days/annual funding-cost day-count basis)Source: Business record
- fundingCost
- Funding cost (currency units on one consistent tax basis)Source: Calculated output
- costRateOfInvoice
- Cost as share of invoice (decimal rate)Source: Calculated output
- invoiceAmount
- Invoice amount (currency units on one consistent tax basis)Source: User assumption
- annualFundingRatePercent
- Annual funding rate (percentage points per year)Source: User assumption
totalLatePaymentCost = fundingCost + administrationCost + delayedCapacityContributionWhere
- administrationCost
- Administration cost (currency units of collection administration cost/late invoice)Source: Business record
- delayedCapacityContribution
- Delayed-capacity contribution (currency units of delayed-capacity contribution/late invoice delay)Source: Business record
- fundingCost
- Funding cost (currency units on one consistent tax basis)Source: Calculated output
- totalLatePaymentCost
- Total late-payment cost (currency units on one consistent tax basis)Source: Calculated output
costRateOfInvoice = invoiceAmount = 0 ? 0 : totalLatePaymentCost ÷ invoiceAmountWhere
- invoiceAmount
- Invoice amount (currency units/invoice face value on the selected tax basis)Source: Business record
- totalLatePaymentCost
- Total late-payment cost (currency units on one consistent tax basis)Source: Calculated output
- costRateOfInvoice
- Cost as share of invoice (decimal rate)Source: Calculated output
- invoiceAmount
- Invoice amount (currency units on one consistent tax basis)Source: User assumption
discountCost = invoiceAmount × discountRateWhere
- invoiceAmount
- Invoice amount (currency units/invoice face value on the selected tax basis)Source: Business record
- costRateOfInvoice
- Cost as share of invoice (decimal rate)Source: Calculated output
- invoiceAmount
- Invoice amount (currency units on one consistent tax basis)Source: User assumption
- discountCost
- Discount cost (currency units)Source: Calculated output
discountedReceipt = invoiceAmount − discountCostWhere
- invoiceAmount
- Invoice amount (currency units/invoice face value on the selected tax basis)Source: Business record
- invoiceAmount
- Invoice amount (currency units on one consistent tax basis)Source: User assumption
- discountCost
- Discount cost (currency units)Source: Calculated output
- discountedReceipt
- Discounted receipt (currency units)Source: Calculated output
daysAccelerated = standardPaymentDay − earlyPaymentDayWhere
- standardPaymentDay
- Standard payment day (days after invoice)Source: User assumption
- earlyPaymentDay
- Early payment day (days after invoice)Source: User assumption
- daysAccelerated
- Days collected earlier (days)Source: Calculated output
fundingCostAvoided = discountedReceipt × annualFundingRate × daysAccelerated ÷ dayCountBasisWhere
- annualFundingRate
- Annual funding rate (decimal annual funding-cost rate applied to the overdue invoice (1 = 100%))Source: Business record
- periodDays
- Day-count basis (whole days/annual funding-cost day-count basis)Source: Business record
- fundingCost
- Funding cost (currency units on one consistent tax basis)Source: Calculated output
- annualFundingRatePercent
- Annual funding rate (percentage points per year)Source: User assumption
- dayCountBasis
- Day-count basis (days per year)Source: User assumption
- discountedReceipt
- Discounted receipt (currency units)Source: Calculated output
- daysAccelerated
- Days collected earlier (days)Source: Calculated output
- fundingCostAvoided
- Funding cost avoided (currency units)Source: Calculated output
totalBenefit = fundingCostAvoided + administrationAndCapacityBenefitWhere
- administrationCost
- Administration cost (currency units of collection administration cost/late invoice)Source: Business record
- fundingCost
- Funding cost (currency units on one consistent tax basis)Source: Calculated output
- administrationAndCapacityBenefit
- Administration and capacity benefit (currency units)Source: User assumption
- fundingCostAvoided
- Funding cost avoided (currency units)Source: Calculated output
- totalBenefit
- Total timing and administration benefit (currency units)Source: Calculated output
netDiscountCost = discountCost − totalBenefitWhere
- discountCost
- Discount cost (currency units)Source: Calculated output
- totalBenefit
- Total timing and administration benefit (currency units)Source: Calculated output
- netDiscountCost
- Net discount cost (currency units)Source: Calculated output
annualisedDiscountRate = discountRate ÷ (1 − discountRate) × dayCountBasis ÷ daysAcceleratedWhere
- periodDays
- Day-count basis (whole days/annual funding-cost day-count basis)Source: Business record
- dayCountBasis
- Day-count basis (days per year)Source: User assumption
- daysAccelerated
- Days collected earlier (days)Source: Calculated output
- annualisedDiscountRate
- Simple annualised discount rate (decimal rate)Source: Calculated output
lowerCostOption = discount when netDiscountCost < 0; wait when > 0; otherwise equalWhere
- discountCost
- Discount cost (currency units)Source: Calculated output
- netDiscountCost
- Net discount cost (currency units)Source: Calculated output
- lowerCostOption
- Lower-cost option (decision state)Source: Calculated output
Money inputs and outputs use the currency selected in the scenario without changing the canonical methodology. Rates, margins, utilisation and buffers are entered as percentages and converted to decimal values for calculation.
2. Worked example
Input assumptions
The worked rows below come from the exact engine and the visible default assumptions.
Calculation and outputs
Example
The worked rows below come from the exact engine and the visible default assumptions.
- Funding cost
- 300.00 currency units
- Total late-payment cost
- 600.00 currency units
- Cost as share of invoice
- 1.6%
- Early-payment discount cost
- 2,000.00 currency units
- Discounted receipt
- 98,000.00 currency units
- Days accelerated
- 30 days
- Funding cost avoided
- 805.48 currency units
- Total benefit
- 805.48 currency units
- Net discount cost
- 1,194.52 currency units
- Simple annualised discount rate
- 24.8%
- Lower-cost option
- wait
The exact engine-derived outputs are shown in the labelled rows below.
Interpretation
The total combines funding, administration and an explicit user-entered capacity cost.
3. Validation and boundary checks
- The day basis must be positive and the entered annual funding rate remains between 0% and 100%.
- Early payment day cannot be later than standard payment day.
- A zero-day acceleration makes the annualised discount rate unavailable without hiding the other outputs.
- Administration and delayed-capacity contribution are explicit non-negative inputs.
4. Assumptions and source classification
- All inputs use one consistent reporting period, balance date, currency and indirect-tax basis.
- Targets and proposed values are user scenarios, not forecasts or benchmarks.
- The early-payment comparison uses discountedReceipt, not the full invoice, when calculating funding cost avoided.
- Administration and capacity benefit is included only when the user enters a defensible monetary estimate.
This planner has no current policy-data dependency. Its commercial assumptions are user supplied. Registered family-level regression suites exercise the shared business-logic engine and worked-result reconciliation.
5. Limitations
- No market rate, statutory late-payment fee, bad-debt forecast or accounting classification is inferred.
- This is educational decision support, not accounting, tax, legal or financial advice.
This is educational decision support, not tax, accounting, legal or financial advice. Check the treatment of your actual transactions under the rules that apply to your business and seek qualified advice where appropriate.
6. Update and evidence policy
Registered family-level suites test formula invariants and example reconciliation; the release ledger records that coverage without claiming a separate oracle for every line of public copy. There is no official threshold or benchmark to refresh for this planner. Commercial inputs remain user-supplied because they vary by business and contract.
Change history
- : Initial public release of the Late Payment Cost planner and methodology.
Related reading
Guides to interpret the decision and its assumptions.
- How Late Payments Affect Cash Flow and Pricing
Trace a payment delay through dated cash, explicit costs and commercial options without assuming a universal pricing response.
Read guide - The Cost of Offering Longer Payment Terms
Compare delayed cash, incremental days and a user-supplied funding assumption before changing payment terms.
Read guide