A document that's used to return an invoice amount as credits made to a customer account or as cash. Also called credit memos.
We encounter credit notes most commonly in retail. When you return the extra night lamp you received as a gift, exchange your defective toaster for a cheaper model or show that you’ve been overcharged for the thingamajig by mistake, the store gives you credits which you can use to buy other items from them.
Subscription billing credit notes are similar. They’re sent out when the business owes the customer money (think of credit notes as the opposite of an invoice). But because of the nature of recurring billing, there’s more to a credit note than meets the eye.
Myth #1: Returning Money to Your Customers is Easy
If you run a subscription business, it’s not uncommon to find yourself in situations where you owe your customers money. What may come as a surprise, is how tricky it can be to actually give it back.
Reasons why you may be in the situation of providing credits to customers:
The common thread that runs through these reasons for credit is that you cannot always anticipate them. They are changes initiated by the customer or prompted by unusual circumstances and have to be handled separately. Some of the challenges that go with this:
How can you incorporate these credits into your accounting system after the invoice has been generated?
How do you keep track of credits for tax purposes?
These questions can be intimidating if you’ve just set up a basic billing system. Even for established businesses, it can be a nightmare in overheads and tracking. But this is precisely where credit notes can make your life simpler.
Myth #2: Credit Notes are Complicated
All of us have heard of and used invoices, but not many of us get credit notes. It seems like another feature that we may or may not use, one more thing to know about and remember. Easily dismissable with a ‘We’ll cross that bridge when we come to it’.
But it’s a bridge that comes sooner than you think. As a business, you want to offer flexibility and transparency in all transactions, and credits are a big part of that. Customer perception of your business depends on whether you honor your promises in a way that’s easy for them, without a lot of complicated hemming and hawing.
Would you rather:
Manually create a negative purchase invoice every time you’re dealing with returns or cancellations
Painstakingly integrate these manually-created notes into your otherwise automated system
Create a credit note in a few easy steps
Have safeguards and logic in place to anticipate different kinds of subscription billing credit scenarios and the ones you deal with the most
Automatically have it integrated into all your revenue calculations
An important thing to note, however, is that credit notes are neither refunds nor promotional credits. With refunds, you are essentially returning the money customers have paid you already and promotional credits are discounts given in the form of credits. Credit notes are a way to record negative charge changes in invoices and provide credits to settle them.
Yes, it’s one more billing feature to look for when you set up subscription billing. But it’s far less complicated to check for credit notes support ahead of time, instead of opting for a DIY job that’s unscalable. Take it from us, it’s the easiest legally binding way to return an invoiced amount.
How do I return money if a customer hasn’t paid my invoice yet?
We see credit notes in two ways: refundable and adjustable. If a customer has paid the invoice, the refundable credit either gives them a credit which can be applied in future invoices or a straightforward refund.
If the invoice has been generated and the customer hasn’t paid it yet, there’s a chance to ‘adjust’ the invoice amount so the customer doesn’t have to pay for the deduction in the first place.