What is a Billing Cycle?

A billing cycle is a period between the last billing date and the current billing date for sales of goods or provision of services. The length of the billing cycle varies based on the service provider but commonly has a span of 20-45 days. It is a critical element of the accounts payable and covers a period in which some services/products were received from a vendor.

When an invoice is received, it involves services billed during that cycle, yet any services rendered outside this cycle are added to be billed in the next cycle. Also, billing cycles apply to ongoing services provision rather than catering to one-time purchases.

A billing cycle varies from a payment cycle as it involves the amount of time an item must be dutifully paid for. Billing cycles play a crucial role in your business performance and maintenance of customer-business relationships. Understanding them and adjusting as per business needs can allow a business to keep track of its performance.

The length of the billing cycle can vary as per business model and industry. For instance, utilities or credit cards follow a monthly cycle, whereas SaaS businesses may have monthly, bimonthly, or weekly annual billing cycles. Billing cycle know-how streamlines cash flow and helps to charge customers rationally. It gauges realistic budget trends and optimizes business processes within the business spectrum.

How does a billing cycle work?

A billing cycle works in just a few steps as soon as a purchase is made. As soon as you begin to receive services from a vendor, the length for billing is established, such as two weeks, a month, or one quarter. During this time period, every product or service bought is added to your account payable.

Once the billing cycle concludes, you will be provided with a statement balance, marking the cycle’s end and the beginning of another cycle. Payment is usually due in 10–30 days, relying on the contract or payment terms with the brand. If the total amount is not paid in due time, it is billed in the next cycle over the amount to be owed in the next one.

For careful examination and analytical insights into your financial business aspects, having a well-curated billing cycle is a must. Billing cycles eliminate any risks of errors in the financial proceedings of a business, as they are automated and often feasible for payments. They allow flawless record-keeping and management of cash inflows and outflows.

What is an example of a billing cycle?

A billing cycle offers business insights and allows maintenance of business revenues via a streamlined process. An example of a billing cycle is as follows:

Suppose a firm in the SaaS industry named ABC Solutions has a monthly billing cycle running from the first of every month till the 30th. During this cycle the company accumulates charges for any services used, such as software subscriptions, cloud storage, and internet services. On the 1st of the next month, the billing cycle ends, and an invoice is generated for the total amount due.

The payment due date is typically 15-30 days after the invoice date; let’s say May 15th. If the payment is not made by May 15th, late fees or interest might be applied, and the outstanding amount would be carried over to the next billing cycle. This example illustrates how a billing cycle works in practice, providing a clear understanding of when charges are accumulated, invoiced, and paid.

Why is a billing cycle significant for business performance?

Comprehending billing cycles is crucial to maintaining healthy cash flow, reducing expenses, and increasing profits. Here are some ways in which billing cycles facilitate businesses:

Cash flow management

An efficient billing cycle allows you to better forecast income and expenses, giving you sufficient cash to pay operating expenses.

Evade fees and interest

Every business incurs expenses. Yet, not meeting payment schedules can lead to late fees and interest charges that consume your profit.

Negotiate improved terms of payment with vendors

Billing periods enable you to identify when money will flow into a bank account so that you can negotiate improved terms of payment with vendors. For instance, you can negotiate more lenient net 45 terms rather than net 30, particularly in the event that you have satisfactory vendor relationships.

How to set up a billing cycle?

To set up your business billing cycle, it is best to undergo a series of steps such as determining cycle duration, date identification, payment terms, billing method, and more. We have discussed each aspect in detail:

Determine the cycle duration

As the first step, you must decide the billing cycle length, such as monthly, bi-quarterly, bi-monthly, and more, as required by the business.

Set up dates

Define when the cycle begins and ends; it helps to follow a pattern of payment collection.

Establish payment terms

Specify payment due dates, late fees, and any interest rates involved.

Choose a billing method

Decide upon an invoicing frequency, its format, and the content involved.

Automate billing processes

Consider using accounting platforms or billing tools that can facilitate the billing cycle.

Communicate with customers

It is best to explain billing cycle details, payment terms, and options to customers, as it can help keep the billing process streamlined.

Monitor and adjust

Regularly review billing effectiveness and make adjustments as per needs. It can help to gauge any challenges that may arise in the billing process.

What are the different types of billing cycles?

Billing cycles are classified as per duration, such as monthly, quarterly, or annual. Each has its unique benefits based on business needs. This can help to choose a billing cycle that matches your business model.

Monthly Billing Cycle

This type of cycle bills customers each month for offerings such as software or any products rendered. This involves user onboarding, tracking their usage of services, initiating the billing cycle, and sending invoices.

Suppose a gym membership is billed monthly. The members receive bills on the 1st of each month for the upcoming month’s services. If any member joins on January 10th, they will be required to pay a prorated fee for January 10th-31st, and then the full membership cycle will commence from February 1st onwards. In this way, the gym makes sure all members are billed on the same cycle, making it hassle-free to manage payments and memberships. Monthly billings are a preferred mode of billing customers.

Quarterly Billing

This type of billing cycle involves billing customers every three months for using certain services and relevant features. The advantages of this billing cycle are manifold. They include lowered initial costs, a shortened sales cycle, frequent engagement opportunities with customers, and a steady revenue stream after each cycle. It also enables nascent businesses to understand the business dynamics and simplify revenue forecasting.

Annual Billing

An annual billing cycle allows customers to receive a bill once a year for the software and its features. The advantage related to this type of billing is instant revenue recovery, covering up for acquisition costs. Moreover, it lowers transaction costs on frequent billings each month or otherwise and lowers churn rate as compared to monthly bills. However, the viability of annual billing depends on the nature of the business, the pricing plan, and customer needs.

What are the advantages of a billing cycle?

There are numerous advantages to a proper billing cycle, such as easier predictability and revenue management, cash flow management, budgeting, invoice handling, and payment planning in a more efficient way. Billing cycle must be considered as a booster dose for your financial health and business progress.

Easier predictability

By having a set billing cycle, businesses can have customers anticipate the invoice generation time, payments due time, cash flow expectations, and other plus points. This allows for smoother financial planning and improved cash flow management involved.

Customer retention

A well-managed billing cycle adds value to the business progress by improving customer retention in a SaaS setup. When billing is expected, it nurtures a sense of transparency between customers and businesses, thus promoting customer loyalty and reducing churn.

Businesses that customize billing cycles to live up to the customer expectations gauge trust and experience high retention as customers are happy with the services and pay bills accordingly. Informing customers about upcoming bills keeps them posted regarding the dues and proactively manages customer queries and challenges that may arise.

Expedites accounting

A well-designed billing cycle makes accounting easier. Automated invoicing can reduce the time used in creating and sending invoices. It allows streamlined recurring payments and reduces chasing unpaid customers. When financial reports are tracked and errors are mitigated, it resultantly offers accurate accounting. In the case of B2B setups, a fine-tuned billing cycle is indicated by a reduced accounts receivable balance, a fast cash collection process, and fewer days sales outstanding (DSO).

Improved customer tracking

Effective tracking and monitoring of sales can help devise strategies with regard to prices. Timely bills can help in verifying accounts payable balance. It also improves accounts payable audits, making them more efficient. Well-structured billing cycles allow non-missed payments and offer a clear view of payment analytics to calculate any overdue or missed payments.

What are the challenges of a proper billing cycle implementation?

Proper billing cycle implementation poses several challenges, such as accurately maintaining customer data, managing tax compliance, managing denied payments, and more. Here we offer a detailed analysis of these challenges in the billing cycle:

Accurate customer data

Maintenance of accurate customer data is important and can be challenging to do if your business lacks robust technological tools and team expertise. Implementing data validation and regular updates can help cater to these issues.

Tax compliance

Managing tax rates and complying with rules and regulations for an exemption can be difficult. Updating billing policies with changes in regulations can keep you ahead of others.

Denied payments

Handling denied payments, retries, and follow-ups is another challenge. Automating denied payments can help to reduce denials and administrative burden.

Invoice accuracy

It can be arduous to make charges, calculations, and data for each customer to be billed. Employing automation technology can help enhance data accuracy and accurate billing cycles.

Compliance

Compliance with industry-specific regulations such as GDPR or HIPAA can be tough. Regular training and audits can help with compliance and avoid penalties of noncompliance.

Scalability issue

Keeping up with increasing transaction volumes and automating processes can be tough. It is important to scale up your billing toolkit with the changing needs of the organization.

What is the significance of billing cycle automation?

Billing cycle automation helps to automate recurring billing in the case of subscription business cycles and can handle cases of payment failures. Also, it can track down missed payments, remove calculation errors, and notify customers/businesses of missed or due payments.

Smooth recurring revenues

When customers are regularly billed, it improves SaaS business success. These recurring payments offer cycle predictability to enhance forecasts and devise business policies.

Easier customer acquisition

When billing is regular and automated, it can improve customer acquisition efforts. Annual cycles render the advantage of keeping the customer sticking around your business.

Smart billing

Automation improves billing and reduces churn as customers have the authority to opt for the best-suited dates for payments.  Automated reminders before or after the due date can help encourage payments and avoid late payment penalties.

Dunning

When payments fail due to card issues or lack of funds, businesses can face negative repercussions. However, through dunning automation, manual efforts are reduced, and payment recovery rates improve significantly.