Business sitting on customer credit balances

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Taken on a hotel and upon reviewing the booking system / sales ledger, note that many customers (a mix of tour operators and individuals) have historic credit balances which are not being automatically applied to newer bookings - in some cases several thousand pounds. These appear to have arisen for a mix of reasons - previous customer cancellations, overpayments and hotel closures (including Covid lockdown).

Furthermore, statements of amounts due for forthcoming bookings are routinely sent out requesting payment, however these do not show historic credits available. 

This does not appear to me to be an attempt to retain the funds, but rather poor processes for applying the credits and regularly communicating them to customers (These credits are notified to the customers when they arise, but not thereafter.)

Does this sound dodgy? What's the best way forward - to advise amending systems to apply historic credits and include historic overpayments on statements?

Replies (15)

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By rmillaree
09th May 2024 12:23

Does this sound dodgy?

it depends on the the contacts between the parties - i would guess its standard or at least common to say deposits may not be refundable eg if customer cancels or doesnt turn up.

I would have no reason to believe its dodgy but it would make sense for them to have clear terms with customers and for the systems to be purged where those terms dictate deposits need to be converted to sales.

Note there can be a complicating issue here if the owner likes to look after customers
and wants to keep record of these unutilised deposits to give them the ability to give loyal customers the deposit againts a later booking - i cant see why that cant be doen on separte list - ie excel sheet of written off bookings.

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Replying to rmillaree:
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By Barry Carlisle
09th May 2024 13:18

Thanks. Lots of ad-hoc agreements with different customers - many of the credits are held, as you suggest, for loyal customers to apply at a later date (rather than being forfeited per standard terms). But not all.

It's quite messy though.

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By Paul Crowley
09th May 2024 12:57

They kept the money but did not declare VAT or pay tax on the profit?
Hmmm, I wonder.

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Replying to Paul Crowley:
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By Barry Carlisle
09th May 2024 13:15

Their system treats all monies received as deposits for VAT purposes, so VAT is declared on receipt.

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By accountaholic
09th May 2024 13:18

In answer to your question I don't think it's dodgy, but it's a commercial matter between you and your customers.

Allocating credit balances to unrelated (other than being from the same customer) balances due can maker the accounting a bit of a mess if both parties haven't agreed the treatment. In your business, it may be that your customers may in turn be collecting payments from their customers, then paying out to hotels, coaches, excursions and so on, and bracket all transactions. To have random credits allocated may be confusing for them so I would be wary. If a query comes out later on from your customer asking for a refund on booking A, and you check and reply that you allocated to to booking B and so on, you could both end up in a pickle.

It sounds like your system treats the statements as one statement per booking rather than a statement per customer, and that might be how your customers prefer it.

I would also try and identify if the credits are due to forfeited deposits or cancellation fees, or are bookkeeping or payment errors by the customer. That might help clarify your thinking.

Also consider whether VAT on payments received without matching sales invoices needs to be accounted for (I don't know the VAT status of your business).

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Replying to accountaholic:
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By accountaholic
09th May 2024 13:19

Keyboard timing - I see the VAT point has been answered.

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Replying to accountaholic:
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By Barry Carlisle
09th May 2024 13:22

Thanks for the detailed response and suggestions!

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By tom123
09th May 2024 14:02

I would be concerned about credit balances stopping being shown on statements of account. That sounds like a bit of an attempt to skim money off.

Sorting out allocations of ledgers is tricky, and takes time and effort. Usually more than just email tennis.

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Replying to tom123:
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By Barry Carlisle
09th May 2024 14:13

I think it really is just bad admin. I think their systems are just so geared towards payment for upcoming bookings and, as suggested in other replies, there are sometime stories behind the credit balances.

I'll investigate further and make recommendations to them.

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Replying to Barry Carlisle:
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By Mr_awol
09th May 2024 14:51

But doesnt it take more effort to suppress a balance than to include it (in most accounting systems)?

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Replying to Mr_awol:
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By Barry Carlisle
09th May 2024 15:09

It is when you're looking backwards - but this process looks forwards at balances due for bookings in the following month. So in May, they'll start chasing June balances (business customers pay a deposit to secure room bookings, with the balance due the month prior to the stay). The process itself requires them to set a date range - it's too early to chase later payments. Although I guess there's nothing to stop them including dates in the past.

So the "statements" aren't for outstanding debts.

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Replying to Mr_awol:
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By rmillaree
09th May 2024 15:11

if these are non refundable deposits (lost due to bookieng going ahead) it woiuld make complete saense for these to be surpressed rather than included - if for example is just lazy admin not doing the adjust to sales. If that is the case its probably theb case that they actively set up new record for each booking as technically stuff before has nom linkage - thats some big presumptions on my part - i would be surprised though if terms dont allow them to keep the money where people dont take up whatever they booked for.

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By JamesDS
16th May 2024 10:52

If the amounts are not likely to harm cashflow, then the easiest thing to do to get the books straight is to write to the customers REMINDING them to call in for a refund on the card/payment method used to make the last booking.

Alternatively, offer them "free" nights, or "free" upgrades, or start a loyalty system where YOU DO NOT EXPIRE THE ACCRUED CREDIT!

"Dear lovely customer, we are pleased to remind you that your account is in credit. We are keen that you receive the benefit of this credit. This is available to you as a refund, or can be redeemed against any future booking or services we provide. We very much look forward to seeing you again"

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John Hextall
By John Hextall
20th May 2024 16:11

This is a difficult question and, if you want to solve it, I think you will need to go through the items individually and determine how the credits have arisen. How historic are they? Could some of them be gratuities? Or cancellation fees? Unallocated deposits? Or other contractual issues? Can the hotel afford to refund them? If none of the customers are banging on the door asking for refunds, they are likely neither due nor dodgy. What does the hotel manager say? They are unlikely to want to pay you for the many hours this detective work will take, nor to just repay thousands to various customers unnecessarily.

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Replying to John Hextall:
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By kim.shaw-and-co.com
21st May 2024 02:15

John Hextall wrote:

If none of the customers are banging on the door asking for refunds, they are likely neither due nor dodgy.

... or they have done and got nowhere. Clients' business travel purchase ledger (supplier) accounts are full of prepaid hotel rooms/deposits paid on rooms cancelled within the cancellation period they have given up trying to recoup, and end up getting written off as bad debts rather than incur the cost of trying to pursue them.

After six years I'll bet a load get written back to the hotel's income line. It's when they try to do it before that things get awkward ...

On another note, the number of hospitality businesses forward-dating VAT invoices for deposits received these days is staggering ... have any of them considered VATTOS3600 https://www.gov.uk/hmrc-internal-manuals/vat-time-of-supply/vattos3600

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