What is a Recurring Transaction?
A recurring transaction is a process that happens regularly, repeating over a set period for a fixed price. It can occur daily, weekly, monthly, or annually, adding rhythm to your financial activities.
These transactions are automated, saving you time. Examples include subscription-based services, monthly insurance premiums, and professional memberships. Recurring transactions are convenient for both businesses and consumers.
In this article, we’ll explore the benefits and how to set them up using accounting software for consumers and businesses.
Definition of a Recurring Transaction
We can break down the definition of a recurring transaction into three parts:
- An agreement between two parties;
- A frequency in which payments are made automatically; and
- The total amount that needs to be paid over the agreed period.
Although the payment is automated, there should still be an element of agreement with a cancellation clause between the two parties.
Benefits of Setting Up Recurring Transactions
Setting up recurring transactions carries many benefits for both businesses and consumers:
- Time-Saving: Automating transactions eliminates manual input, saving a significant amount of time.
- Improved Cash Flow: For businesses, recurring transactions can help in maintaining a steady cash flow, which is crucial for a business.
- Convenience: For consumers, automated payments mean no worries about missing payment deadlines.
- Customer Retention: For businesses, recurring transactions can aid in customer retention. The convenience of automated payments can lead to long-term customer loyalty.
- Predictable Income: Recurring transactions provide predictability. Businesses can forecast revenues more accurately, and consumers can better manage their budgets.
- Reduced Paperwork: Automating transactions reduces the need for paper invoices and physical records.
Remember, while setting up recurring transactions has numerous benefits, it’s crucial to maintain transparency and ensure customers are fully aware of the terms and conditions involved.
Examples of Common Recurring Transactions
Examples of recurring transactions include:
- Subscriptions: This could refer to monthly payments for newspaper or magazine subscriptions, software membership, streaming services like Netflix or Spotify, etc.
- Utility Bills: Recurring transactions can be used for paying the service provider for electricity bills, water bills, phone bills, internet bills, etc.
- Rent: A Recurring payment can be set up for rent.
- Insurance Premiums: Automated payments are commonly used for insurance premiums such as car, medical, home and travel insurance.
- Loan Payments: Mortgage and loan repayments are ideal for recurring transactions.
How to Accept Recurring Payments
Accepting recurring payments is an easy and straightforward process. Payment gateways like PayPal, Stripe or Square offer reliable services to help accept automated payments without much hassle. You can integrate their solutions into your website or mobile app.
Accounting software has recurring options with the issue of sales invoices. We will look into this in more detail later.
You can also set up direct debits with a bank to accept a recurring payment. This requires setting up an agreement between the payer (customer) and the payee (business), along with other details such as frequency, duration and payment amount.
Recurring Transaction Payment Methods
Recurring transactions are paid using a variety of payment methods, including:
Debit Card Payments
Debit cards are also a great way to make recurring payments. Using your debit card guarantees secure transactions, and you can easily track expenses using the bank statement.
Credit Card Payments
This is the most popular method for recurring payments as it’s quick and secure. Credit cards are also widely accepted, so customers can be sure their payments go through.
Direct Debit with a Bank Account
Using a bank account to set up a direct debit is another secure and convenient way to accept recurring payments, as customers don’t need to input their details each time manually.
Customers must set up an agreement with the business for automated payments before setting up a direct debit. This form of payment also requires that customers provide their banking information, so it’s important to ensure their systems are safe from malicious transactions.
Manual Payments
Manual payments for sales invoices are an option that offers control over the payment process. Although it involves more hands-on management than automated recurring payments, it can often be preferred for those who want to monitor their finances closely.
This method involves the customer paying each time an invoice is received through bank transfer, cheque, or cash payment. It may be suitable for businesses that have an irregular payment cycle.
PayPal Payments
PayPal is a widely used platform for facilitating recurring billing. Businesses must have a PayPal business account to set up automatic billing via PayPal. Once this is accomplished, they can create a ‘Subscription’ button via PayPal’s website, which can then be integrated into their website or app. This button lets customers opt into a recurring transaction schedule for goods or services.
When a customer chooses to subscribe, they are redirected to PayPal’s site, where they log in to their PayPal account and approve the recurring payment plan.
Data Protection and Security
A business needs to ensure data security when accepting recurring payments. This includes encrypting customer information, such as credit card numbers and bank details, so unauthorised parties can’t access it.
Customers should also be able to access their payment history at any time, allowing them to monitor payments made on their accounts.
Recurring Billing in Accounting Software
Utilising recurring billing in accounting software can dramatically streamline the invoicing process for businesses. This feature allows businesses to automate the generation and sending of invoices for recurring payments, freeing up valuable time and ensuring accuracy and consistency.
With recurring billing, businesses can set up a schedule, such as weekly, monthly, or annually, and the software will automatically generate and send invoices to customers according to this schedule.
Additionally, accounting software provides a centralised platform to keep track of all recurring transactions. This way, businesses can monitor which invoices have been paid, which are pending, and which are overdue. The software can also send automated reminders for unpaid invoices, making the process more efficient and stress-free.
Recurring Billing in Xero
Xero offers an easy option to create a recurring invoice for a customer. To access recurring billing go to Business, select Invoices, then select the repeating tab and new repeating invoice.
Several options are available to set the invoice frequency, including daily, weekly, monthly, or custom intervals. Additionally, you can specify the invoice details, such as itemised breakdowns, payment terms, and due dates.
Recurring Payments in Accounting Software
Most accounting software programs now offer the feature of importing bank statements: QuickBooks and Xero speed up the process of posting recurring payments by creating bank rules.
If a bank rule is set for a recurring bill, the transaction will automatically post to the correct supplier and account code with one click. It helps to save time and reduce mistakes.
Tips for Recurring Transactions
Stop Recurring Payments – Remember to stop recurring payments for automatic payments for subscriptions or memberships you no longer need.
- Regularly Review Transactions: Review all transactions to see if they are valid and at the correct price.
- Maintain Good Communication with Customers: Keep your customers informed about automatically billed transactions.
- Ensure Data Security: Always maintain the highest level of data security to protect your customers’ sensitive information.
- Offer Various recurring transaction Payment Methods: Offering a variety of payment options can make it easier for customers to choose a method that suits them best.
