Back Charge

What is a Back Charge?

Back Charge is an additional bill raised for in relation to work done previously due to some element of billing missed in the previous billing cycle or any adjustment or any late fee or additional charges.

It is mostly used in industries where the transactions are prone to some errors or mistakes in the day-to-day business affairs. It is charged either on a real-time basis, or it can be charged later down the billing cycle. The major industries which do back-charge are banks, credit card companies, construction companies, manufacturing, wholesale, retail, etc. It is best to avoid back charges and do the billing rightly to the customer as it may bring up the recoverability issues. It so happens that sometimes back charge receivables are tough to recover.

Example of Back Charge

ABC Stores is a wholesale seller of grocery products. Mr. X is a regular customer of ABC Stores who runs a retail shop. He purchases condiments from the store on a monthly basis; the products are directly delivered to Mr. X along with the bill. In the month of December, due to the year-end clearance sale, the billing of some products is missed to Mr. X, but the goods are delivered as usual. So due to this, in the month of January, the owner of ABC Stores made the December bill as a back charge and added up to the January bill.

Z Corporation is a construction company; considering the nature of the business, they have running account bills with their sub-contractors. It so happens most of the time that there is under charge or overcharge for the work done. So it is more like a customary practice in this industry, and settlement happens accordingly.

KBC Bank has decided to increase the credit card fee from September, but the same is not informed to customers till November, and the increased charges are sent as a back charge along with interest charges to the customers. This could have been done in real-time and could have been informed to the customers before, so it doesn’t come to customers unexpectedly. It looks like a purposeful delay to charge the interest on late payment of an increased fee.

But it is best to raise the bill then and there to avoid confusion and other legal issues. If any billing is missed, it is best to inform the customers before charging the back charge.

Keys to Success with Back Charge

Back charges can be made feasible with the right communication and proper documentation. It has to be communicated clearly to the customers and business partners so that it doesn’t come as unexpected or shocking to them. In the same way, the back charge should be backed by proper documentation so later on, there cannot be any conflict or disagreement on the charges.

If the back charge system is aligned and agreed upon between the parties, then it could be easier to deal with the back charge billing. However, miscommunication or gap in communication and lack of documentation will lead to disagreements, and recoverability of back charge receivables becomes challenging.

Significance

The back charge billed is part of the company/business accounts receivables. In order to have the right balance sheet, the receivables in the books should match with the payables of customer books. Their receivables are like regular receivables as the company that renders service or deliver goods needs to receive the money from the customers that are missed to bill in the original billing. Therefore, any disagreement or non-recoverability of these receivables are like bad debts and their loss to the business.

Advantages

• It helps to recover the money in case of any incorrect billing if the originally billed amount is lesser than the revised bill or to correct any mistakes in the billing. It helps the business owners to recover the money from the customers, which is missed erroneously.
• If the original bills are not cleared on time, it will give the customers/ business partners an opportunity to clear the dues. This mechanism gives one more chance to the customers and helps in avoiding disputes on non-payment on time.
• It helps in the right accounting of the accounts receivables and accounts payables on the books of both the parties to the transaction. Any accounting miss could impact the profitability of the business and also the presentation of the financial statements. It could lead to misrepresentation of the Income statement and Balance Sheet.

Disadvantages

• Billing rightly on the first time is important as sometimes back charge won’t be accepted if the back charge bill is raised late in time.
• It is tough to recover the back charge billing receivables due to disputes or disagreements or customers refusing to pay the amount. However, if not recovered, it could be bad receivables and affect the profitability to that extent.
• Sometimes it can lead to legal issues, and it can disrupt the relationship with customers.

Conclusion

The prime purpose of the back charge is to bill the customers for the services rendered or goods delivered but failed or missed to bill at the right billing cycle. It could be due to multiple reasons, missed to bills, incorrect charges, additional charges, late payment fees, etc. It is billed to the customers in order to recover the money for the services or goods delivered. Therefore, it is always better to avoid back charges as any additional charge could come as an unexpected factor to the customers, plus it is also very tough to recover the back charge receivables if the customers don’t agree or fail to pay.

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