Monthly Compounding Interest Formula

Income and expenses – the fundamentals to financing projects. Once the source of income has been decided, properly determining and evaluating all necessary expenditures for a proposed project is essential. In order to maintain proper accounting a capital budget is needed. This capital budget, as it is defined by Investopedia is “the process in which a business determines and evaluates potential expenses or investments that are large in nature” (para. 1). The Federal Government must be as responsible and any other organization when it comes to managing finances. The Department operates on a calendar that utilizes a fiscal year in order to properly calculate when, how much, and which expenses are paid. In this, it is important to understand rules and regulations that govern this process. A capital budget is a plan that involves acquiring and spending funds to be paid back over a period of time and includes possible rates of return (Business Dictionary, 2016 and Investopedia, n.d.). Since the Department operates differently from profit based organizations, its acquisition of funds and repayment plans differ from other businesses. For instance, just as any other business must report financial income and expenses, the Department’s actions are regulated by Prompt Payment Act. This act, found in 31 U.S.C. Section 3901 (as cited by Peckinpaugh, 1996), regulates how the Department repays obligations due to contractors or other businesses. Specifically, the act stipulates “payment must be made within 30 days after receipt of a proper invoice from the contractor or another such date as specified in the contract” (Peckinpaugh, para. 3, 1996). If prompt payments are not submitted within the allotted time frame, then interest on the payment is calculated at a specified rate. Therefore, although the Department is not profiting from the investment, it definitely can loss more money from not submitting timely payments as agreed upon per contract. To further understand how this process could potentially stifle the progress of the project, it is necessary to understand how interest calculations impact the budget. There are two different formulas – the simple daily interest and the monthly compounding interest – used to calculate the payments extended for the services or good acquired. Per the Bureau of Fiscal Services (2015), the timing of the payment determines which formula is used to calculate interest. If the payment is made within the 30 days of receipt of invoice, then the simple daily interest formula [P(r/360*d)] is used; whereas the variables are explained as follows: • P is the amount of principal or invoice amount; • r is the Prompt Payment interest rate; and • d is the number of days for which interest is being calculated. The monthly compounding interest formula is used when an invoiced amount is paid outside 30 days from receipt of invoice. …show more content…
This formula is a bit more complex than the simple daily formula. The monthly compounding interest formula uses a two part formula to determine the amount of payment to be paid per the Prompt Payment Act. According to the Bureau of Fiscal Services (2015), this two part method of calculating interest involves both compounded interest and simple interest. First, the interest is compounded for the month. Then, for every day the payment goes past 30 days late, daily simple interest is cumulated. The formula for this type of interest is P(1+r/12)n * (1+(r/360*d)) –P; …show more content…
Pro forma, according to Investopedia (n.d.), is the display of different financial scenarios based on a business’s financial status from a current or previous financial status. In as much, financial data in a pro forma financial statement includes information from either the revenue or the expenses aspect. The purpose of the pro forma form is to express the financial statement without the extraordinary ventures. The form also displays the financial situation for possible projects. In other words, what would happen financially if the organization were to move forward with the proposed project? The figures presented by the pro forma financial statement are not always in compliance with the GAAP (Generally Accepted Accounting Practices). However, this is not a problem since the Securities and Exchange Commission (SEC) has implemented strict requirements concerning reporting of this type of financial information. According to Investopedia (n.d.), “The SEC also made it clear that utilizing pro forma results to lie about or grossly misconstrue GAAP-based results would be deemed fraud and punishable by law if investors were misled”(para.