Stacking the Pennies Perfectly, Avoiding These Common Pitfalls
Problem: Not relying on the accuracy and accountability of Moneylender’s systems.
You start using Moneylender, but you don’t trust that Moneylender is doing what you want. Perhaps you were managing your loans in Excel and input every number by hand. Losing that familiarity with every single penny feels wrong, like your loans are out of control.
Perhaps you have a strong accounting background, and you want to apply the principals of standard business bookkeeping to the loans as an aggregate and each loan individually. You expect that the money should all present itself in an orderly, linear fashion on both the loan’s calculations and the bank account.
Solution: Review Moneylender’s transactions in detail so you can be entirely confident in the correctness of the numbers.
In the first example, losing control feels bad. By checking Moneylender as you might check your hand-calculated values, you can be absolutely certain that the numbers are perfect to the penny. If the numbers aren’t perfect, you can be sure there’s a setting somewhere that might need some slight adjustment. Use the Ledger Transactions report that comes with Moneylender to check the individual transactions across the accounts on a single loan. You can quickly see exactly how much is being charged and applied from the very start of the loan to today (and a little beyond that, even).
In the second example, the way loans function does not conform directly to normal bookkeeping. An exceedingly common example: a payment arrives at the end of the month, but since you earn interest on a loan monthly the payment is applied to the loan on the first of the next month, after the interest has been earned. This is exactly what you would expect to happen. You balance your bank account and attempt to match the principal and interest received on each payment to the balances of the accounts. You compare the payments to the balances at the end of the month, but because the payments don’t affect the balances until the first of the following month in Moneylender, the funds seem to mysteriously vanish from some reports, and are overstated on others.
Reviewing the individual transactions on each loan so that you are comfortable with how payments are received and applied will help you get comfortable with the different numbers that appear in Moneylender. If you can be certain the pennies on every loan are perfect, then you can be certain that the numbers on the reports overall will perfectly account for all the money. When you are confident that Moneylender is tracking the pennies perfectly on each loan, you will be able to let go of the notion that balancing the bank account and balancing the loans are the same task with the same numbers. It is OK that the total balance outstanding is different in your bookkeeping when compared to Moneylender’s balances at any given instance in time.
Problem: Wanting the accounting system to know everything Moneylender knows.
You may have been doing the books for a long time, and you know your numbers. Suddenly Moneylender is thrown in the mix and now you have all these individual accounts. You want your bookkeeping software to continue to be the authority of all your money, so you try to find an easy way to get each individual loan’s details from Moneylender into your books. The numbers just don’t fit right, nothing adds up, and you wonder what the heck Moneylender is even doing to come up with these seemingly random numbers on its reports.
Solution: Let Moneylender be your bookkeeping for individual loans.
Resist the temptation to use your bookkeeping software to do something it is not built to do. In Moneylender each loan is actually a collection of seven separate accounts being tracked simultaneously. These accounts work in concert to determine all the various figures needed to manage and balance the loan. You can’t draw a seven-dimensional object on a sheet of paper. You can’t take seven accounts and consolidate the activity into a single account and retain the entirety of the details. Moneylender’s systems will do the hard work for you, and they provide you with a crystal-clear audit system to review each account independently – the Ledger Transactions report. Your bookkeeping software needs to know about anything that touches the bank: principal and escrow disbursals out of your account, and payments received, for example. You can enter the aggregate interest, fees, and escrow from the payments received into your bookkeeping for profits and escrow information, but avoid getting more detailed than that.
You bought Moneylender to make your life easier. You are used to digging dirt, and have become quite handy with a shovel. Now find you have to break up some large stones, so you buy a pickaxe. You don’t try to use the shovel to do the job of the pickaxe. The pickaxe handles breaking up the stones, and the shovel removes the gravel. Let Moneylender and your bookkeeping software do their respective jobs. The overlap is probably quite a bit narrower than you expect it to be.
Problem: Over-using one part of the program because it’s familiar.
You have been entering payments on your loans for a while, and you’re really comfortable choosing the right settings on Moneylender’s payments tab. You run the regular statement like a pro, and you can kick out a payment distribution report, no problem. An unusual situation pops up and you try to figure out how to make the numbers you want show up in the places you are familiar with using the tool the same way you usually do. Like trying to use the turn signal in a car instead of the hazard lights. Both switches make the blinkers blink, but the different pattern stems from totally different situations. The tool seems related to what you know, but how you activate it is positioned in an unfamiliar place. The most common symptom of this problem is that you start using negative payments to make a number change on a report.
Solution: Explore and experiment boldly with the less familiar. Make a portfolio backup or export the loan as a safety net.
If you’re afraid you’ll break something, you can click File > Backup Portfolio to make yourself a copy of the portfolio in case you really do manage to cause total carnage. Alternately, select the loan and click Tools > Export Selected > type a new name for a portfolio in the window that pops up, and now you have a copy of the loan in an isolated portfolio where you can poke and prod without fear of harming your main portfolio.
Just as you did some work to learn the parts of the program that have become routine, it’s time once again to get out of your comfort zone and learn some more about what Moneylender can do. With something like 100,000 loans in Moneylender worldwide, it’s unlikely that you’re bumping into a situation that hasn’t ever happened before.
Look in the table of contents of the User’s Guide for topics that are related to what you’re doing. That is a great way to expand your understanding of how all the pieces of Moneylender can help you solve your situation – adding to the handful of pieces you already know really well. You’re really good with zip-ties, but think about being great with zip-ties AND paper clips. So many new possibilities!
I know it’s an hour of your life that you’ll never get back, but watch this video on all the loan settings in Moneylender. Seeing what each thing does, and how it affects the transactions on a loan will take you a long way toward knowing what’s possible and knowing where to look for more information.
Don’t be afraid to push the (?) buttons on the various windows in Moneylender. It’ll take you to the exact spot in the user’s guide where you’ll get details on how to use the thing you’re looking at. It opens a browser window, so it has no effect on Moneylender or your records at all.
Problem: Trying to make the real-world loan match the paperwork at origination.
You just originated a loan, and the borrower paid their first three payments on time. Everything looks beautiful. The Payment Distribution report looks just like the beginning of the amortization table. The sun is shining and the birds are singing. Then the borrower misses a month and then makes a regular payment, or rounds up their payment to the nearest multiple of 10, or pays an extra $500. The Payment Distribution breaks away from the Amortization Schedule.
A similar manifestation of this problem is when you’re setting up the loan and Moneylender’s suggested payments don’t match what you have on your paperwork. You fiddle with the various dates and rates and settings in the loan wizard, but the suggest payments just never quite line up.
Solution: Throw out the idea that correctly accounting for a loan means it has to follow some prescribed path.
I know of but few instances where a loan was repaid exactly in accordance with the amortization schedule. Fewer still are the lenders that held themselves to the rule that you can foreclose after three months of nonpayment. The proper and accurate accounting of a loan comes from the correct calculation of interest, adding fees in accordance with the terms of the contract, and applying the payments at the correct times to the correct amounts.
Your loan WILL DEVIATE from the amortization schedule. This is normal. Moneylender’s payment suggestions might differ a little from the method used to come up with the loan contract. This is also perfectly normal. Just enter the payment amount from the contract, regardless of the suggested numbers. If the suggestions are extremely different for no discernible reason, there’s probably a setting somewhere that is way off. If it’s a few cents or a few dollars, don’t worry about it.
You use the settings on a loan to tell Moneylender the rules of the contract. Moneylender will then do all its fancy footwork to follow those rules for you. The systems are built around two ideas: you are going to collect the fees and interest that you are entitled to collect in accordance with the contract; wherever there is the possibility of two methods of applying funds, they will always be applied in the way that follows the rules to the benefit of the borrower. If the records are set up correctly, you’ll never have to worry about the program taking money from the borrower that you are later forced to give back. You’ll also get your late fees and interest in accordance with the contract – you deserve to be collecting what the borrower agreed to pay, and Moneylender will do that for you.
The settings define the rules, and the borrower’s performance on the contract defines the balance. The balance is largely out of your hands once the borrower starts repaying the loan. The interest isn’t going to follow the amortization schedule if the borrower’s payments don’t follow it. That is normal and correct. If you are concerned about a deviation from the amortization schedule – look at the amounts and timing of the payments. If those differ from the amortization schedule even a little, you can forget ever referring to that schedule again, it’s moot.
You can, of course, manually change any balance in Moneylender at any time using Adjustment settings, but you don’t want to use adjustments to “correct” an interest calculation. Adjustments should be reserved for actual deviations from the contracted terms – for example, you elect to waive a late fee. Here you are manually overriding the terms of the contract to forgive the fee, and in Moneylender this takes the form of a Fee Adjustment in the opposite amount of the late fee being waived. If you edit the interest, you’ll end up doing it forever, and that is not why you bought Moneylender. There’s a good chance there is a checkbox or other setting that just needs to be changed to make the program do the math slightly differently.
By the same token, Moneylender’s payment suggestions are not as robust as the calculator itself, nor does the calculator care in the least about the math the payment suggestions are using to come up with their numbers. Once you tell Moneylender how much to expect from the borrower each month, Moneylender happily follows that rule.
Problem: Trying to get every number from a single report.
Each report shows a specific view into the numbers. If a report shows you the face of a seven-dimensional object from one perspective, you’re going to need several reports to really see a clear picture of the loans. Line up several loans side by side, and you’ll need many vantage points to truly illuminate the situation.
Solution: Learn the utility of each report in Moneylender, and create your own reports to give you exactly the perspective that matches how you operate.
The Payment Distribution is the go-to report for showing how your borrower’s payments have been applied to the loan. It does not show non-payment transactions at all. Don’t try to make non-payment transactions appear on this report.
The Ledger Transactions report shows the individual transactions and resulting balance in any one of the seven accounts on the loan at all times over the life of the loan. You can choose the account to show from the Account dropdown at the top of the window. To see each transaction on the loan, the Ledger account is your overall balance. If a borrower wants to see something on their loan balance, give them the ledger for some reasonable period of time. To see the fluctuations of their escrow account over time, run the Ledger Transactions report on the Escrow account. To see if they were paid current, ahead, or behind, run the Ledger Transactions for the AmountDue account.
To determine your money in and out (principal you gave to borrowers and payment you received) use the Cash Flow report. To see how much principal was loaned and received, interest was earned and paid, fees were charged and collected within a date range, use the Financial Activity report.
To get a list of the individual payments received with a date range use the Payment Reconciliation report. This report is especially helpful for reconciling your records in Moneylender to your bank account, whether directly against the bank records or through bookkeeping software as an intermediate step.
Add columns to reports when you just want a little extra information that’s related to the rest of the data on the report. If you want some numbers for a certain period of time, and it’s not closely related to the information on a different report, create a brand-new report. It’s ok to run several reports. It’s not too painful, even with 10,000 loans, to let the report compile the numbers for a bit. You can load multiple reports concurrently if you want. Often, stuffing all the columns on one report will take longer to load than the combined load times of two reports where the same data is logically separated. The report engine will try to load only the data required to compute the values for the columns of the report.
If you took the Payment Reconciliation report and added the principal balance to it, and put a sum on the new column, the total of all principal balances is an unreliable and incorrect number. Since Payment reconciliation lists each payment on its own line, and the principal balance is the principal after each payment was applied, and you might get two payments from the same loan within the report date range, you’d have two principal balance numbers from the same loan getting added into the sum at the bottom of the report. Making a separate report explicitly to list the principal balances of the loans in your portfolio ensures you don’t inadvertently start doing your books against a set of numbers that are functionally erroneous. This can be especially tricky when you have months where only one payment arrives for each loan, making the number appear to be reliably correct, and then to have that number kick out something wrong later when you get double or zero payments on a loan.
Problem: Wanting to track all the individual loans in the accounting software.
Your accounting software is the master of your finances. It needs to know everything about the flow of funds through your business. Moneylender is a calculator that helps figure out balances, but the valuation of assets and final authority of all your business holdings must rest within your bookkeeping system.
Solution: Treat Moneylender as the absolute authority of the value of your loans.
You have a shovel and a pick now. You don’t want to break rocks with the pick until you figure out how to break rocks with the shovel. Bookkeeping software is not built to account for loans with any degree of convenience. Moneylender is not built to do your company’s books, either. They are two very different tasks. You have invested $500, or $1000, or maybe even $5000, to outfit the people in your organization with Moneylender. It is a powerful system, built to do the accounting for your loans. Honor your investment in this system by shifting the responsibility for the loans into Moneylender. Don’t worry, it can handle the pressure. There are tens or possibly hundreds of billions of dollars being serviced in Moneylender, and other currencies, too. Moneylender is in use all around the world, in every conceivable configuration, to handle the requirements of businesses of all sizes, from the accidental lender with one loan for $3,000 to the national lender with thousands of loans across all sorts of regulatory boundaries.
Lean on Moneylender. Let it do its work for you. If you get stuck, we’re here to help. You made the right choice investing in Moneylender with both your money and your time.
Problem: Wanting to reconcile loan balances against the bank account from month to month.
You can reconcile your payment entries and the principal paid out to the bank. Moneylender shows you how much you paid out, and how much principal was paid back in. Yet, when you try to get these numbers to add up at month end, Moneylender’s reports are frustratingly misaligned with each other. How could anyone trust a system like this?
Solution: Don’t worry about matching up balances for specific date ranges when you’re working in terms of payments received.
Everything in loans has two dates – the date you got the money, and the date the money actually affects the loan balance. It is almost more common than not that you’ll receive money one month, but it’ll show up on the next month’s reports. Just make sure you haven’t misapplied any payments, everything made it into the bank ok, and you can double-check that your disbursals have properly paid out of your bank across your loans. Beyond that, your bank doesn’t know enough to help inform you of your loan balances. But Moneylender DOES have the knowledge. Moneylender can tell you exactly what the principal balance is at all points in time on any loan and you can review every single transaction Moneylender generates for accuracy and applicability. At the end of a loan, when it is closed and the balance is zero, then you can be certain that the total principal you’ve paid out in disbursements on the loan will exactly equal the total principal received from payments on the loan (plus whatever amount you might have had to charge off). The month-to-month boundaries are not as important. Use the total interest received for the year from the Payment Reconciliation report if you want a cash accounting style of your interest income. Use the total interest paid on the Financial Activity report if you want more of an accrual style accounting. In the end, neither one is particularly more correct than the other, so pick the one you like the most and stick to it. Moneylender can give you the numbers and you can feed it into your books every week or month or year.
I hope this hasn’t come across as a lecture. My eight-year-old son knows how much I love to pontificate on the minutia of technicalities. Some of the greatest despair I hear on phone calls with customers is when they’re trying to appease a bookkeeper or an accounting team that wants their bookkeeping software to understand loans the way Moneylender does. And it’s a hard pitch to sell that some of the bookkeeping and accounting is going to have to be done outside the familiar systems. At the very least, Moneylender is going to need to be responsible for the balances and amounts due on all the loans. Any attempt to transcribe that balance and receivables data out of the system is likely to create confusion, double-entry, and long-term problems. A couple hours tinkering in Moneylender’s reports might be all it takes for a CFO to trust that Moneylender can break up the boulders into easily shoveled gravel.
If you aren’t already using Moneylender, you should get yourself a copy and simplify the management and servicing of your loans. We pride ourselves on making some truly outstanding loan servicing software. We want everyone to have access to it as a tool to gain greater profit, efficiency and accuracy. Thanks for reading all this way.
Tell us your stories about working over your books with loans in the comments!