What Does Billing in Arrears Mean?

Billing in arrears is a billing strategy where businesses charge customers after delivering an ongoing or one-off product or service. Instead of taking the payment beforehand, you wait until the service has been provided. The main purpose of this type of billing is to easily predict the estimated cost based on the scope or variability in usage and simplify the payment process.

Billing in arrears works as a trust arrangement for customers who can ensure a product’s value and inspect the vendor’s commitment to delivering the highest quality of goods or services.

This billing strategy works best for the B2B market, e-commerce businesses, restaurants, freelancers, or any other firm established on a usage-based pricing model.

Say you take your car to the mechanic, they fix the issue, and only after the work is done do you get the bill and pay them. This is a classic example of billing in arrears. The service comes first, and the payment comes after.

As much benefit as arrear billing provides, it does come with its risks. Small businesses dependent on big jobs that are billed in arrears can face potential cash flow issues. That being said, other billing options are available for businesses facing challenges with billing in arrears.

How is the Billing in Arrears Processed?

Billing in arrears follows a simple process:

Tracking usage

The product or service is delivered to the customer. During this period, the business tracks the customer’s usage, consumption, products, and orders.

Issuing Invoices

After the product has been delivered and the usage period is over, an invoice is generated that specifies the details of the services rendered and is sent to the customer.

Making the Payment

The payment is made by the customer within the timeframe mentioned on the invoice, before the due date.

Why is Billing in Arrears Used?

Billing in arrears is used when upfront costs are undetermined, and calculations can’t be made as to how much customers will be charged. Businesses using the billing in arrears model offer flexibility to their clients. Not only that, but they also provide more transparency since there is an evidential breakdown of costs and services used.

This, in turn, builds stronger client relationships as it offers them better payment terms. In addition, it supports advanced billing management like tiered pricing, performance-based fees, and options for add-ons. In some cases, late payment risk can be a concern for businesses, and it may be complicated to manage.

What is the Difference Between Billing in Arrears and Billing in Advance?

Billing in arrears contradicts billing in advance, which occurs before the service provision. In arrears billing, you charge a customer after they receive a product or service, while in advance billing, you send the full invoice before the service is provided.

For instance, many subscription billing software expect an upfront payment. Likewise, gym memberships, mobile network carriers, and online courses all use the billing-in-advance method to collect payments.

Looking at it from the business’s end, it may be easier and more fruitful to get the payment in advance and offer the service later. However, this can shake the trust of your customers. If they’re not entirely sure about the credibility of the product, they may not be willing to pay in advance.

Hence, this method works best for customers who have already tried your service and want to purchase it again or in industries where billing in advance is the industry standard.

For businesses that do successfully offer billing in advance are better able to manage resources, allocate budget, and produce cash flow that is plain sailing. This gives them high returns on financial stability and security while the customers remain committed.

When it comes to choosing between billing in arrears and billing in advance, the selection process depends on several factors. You need to consider your customers’ expectations, the nature of your service, and cash flow needs.

Some businesses prefer getting the best of both worlds and adopt a hybrid model. For example, a SaaS service may charge a base fee of $50/month upfront and then bill in arrears for any additional facilities or add-ons. This proves to be more effective since the customers are presented with flexibility, and the business can reap the rewards from a steady income stream.

What are the Pros and Cons of Billing in Arrears?

Billing in arrears offers many benefits to businesses, but this billing model also has its drawbacks. To understand what factors businesses should keep in check before opting for this billing method, let’s look at the following list:

Pros

Predictable Cash Flow

Billing in arrears benefits both the business and the customers. For businesses, this is possible through managing their finances by paying for goods and services after receiving them, instead of upfront.

For customers, because they’re paying after they receive the service, there’s an immediate short-term cash flow reward. Secondly, they don’t have to face future cash flow issues that occur in advance billing. This certainty helps them be more confident in paying for services they utilized.

Transparency

When customers pay for the actual services rendered, it fosters trust. Businesses offering the billing in arrears model to customers help strengthen customer relationships and satisfaction.

Less Hassle of Refunds

Billing in arrears saves businesses from sending refund cheques due to overpayment or instances where fewer services are used than estimated. Billing after services are delivered gives businesses the liberty to charge in accordance with the service consumption. This saves them the hassle of making adjustments.

Fix Before You Bill

Businesses offering a billing in arrears model of payment can promptly rectify any issues related to the service before charging fees. This kills two birds with one stone. First, it develops trust and value in the customer-client relationship. Second, businesses can easily manage customer offboarding if they prove to be unreasonable.

Common Expectation

While many industries prefer billing in advance and prepaid subscriptions, there are still businesses that prefer the post-service payment model. Paying after you receive the service is a common expectation. Hence, billing in arrears is the natural payment mechanism that business owners and customers select.

Flexibility

It is a clear advantage to offer customers the flexibility to pay after the work is delivered. It means they don’t have to commit if they don’t want to, test before they pay, and pay for the actual usage. It also gives you an edge over your competitors if they’re not offering this billing model.

Cons

Risk of Nonpayment

Billing in arrears always comes with its risk of nonpayment. This transaction is built on a foundation of trust. It is quite possible that a company delivers its services but doesn’t get paid from the other end. One of the reasons could be that the customer feels unmotivated to make the payment after using the service. Another possible cause could be poor budgeting on the client’s side to make end-of-cycle payments.

Loss in MRR

Businesses offering the billing in arrears model may face cash flow challenges. When customers fail to pay on agreed-upon dates or within the time frame provided to them, the payment processing gets delayed. This causes a cash crunch, leading to a delay in overall workflow and a reduction in the predictable recurring revenue generated by the business. Small to mid-sized businesses may face greater challenges due to this.

Making Adjustments

Changes due to the scope of work, errors, addressing discrepancies, or refunds can be tricky to manage. These billing adjustments need to be handled with clear communication, accurate documentation, and transparency. However, if handled poorly, it can lead to a negative customer relationship.

Administration Burdens

Managing billing in arrears requires preparing detailed invoices, dealing with multiple clients, sending payment reminders, and ensuring that payments are made, which can be taxing. Moreover, businesses that are continuously scaling find it more difficult to handle such invoices.

How to Reduce the Risk of Billing in Arrears?

Reducing the risk of billing in arrears is crucial for a company’s long-term financial stability. However, with the right approach, the risks can be mitigated. Implementing strategies like a consistent billing cycle, multiple payment options, invoice generation, agile customer service, and prioritizing clear communication can move mountains. Let’s understand them in detail.

Consistent Billing Cycle

Consistency adds a predictable flow to the income generation for businesses. For example, if a company always invoices on the 1^st of the month, it is easier to track payments. Moreover, it’s also easier for the customer to save the service fees budget prior to the date.

Multiple Payment Options

To reduce the risks pertaining to billing in arrears, offer multiple payment options to your customers. This includes credit and debit cards, bank transfers, PayPal, Apple Pay, and Google Pay. You can go a step further by offering monthly instalment agreements. The end goal is to increase the likelihood that the customers will pay on time. Hence, you work to enhance their convenience and build deeper relationships.

Invoice Generation

When generating invoices to issue to your customers, work to focus on two things. The first is to make them detailed by adding all the services and goods delivered. This is a good practice to offer a clear insight into what they’re paying for. Consequently, they feel more confident to pay.

The second factor to consider is swiftness. Invoicing as soon as the product or service is delivered reduces the risk of late or non-payment. You can expedite the payment cycles and ensure recurring revenue.

Clear Communication

Changes are inevitable when it comes to billing in arrears. How they’re communicated is what matters most. Businesses should focus on clearly communicating with their clients regarding any changes in scope. They should also be transparent in the documentation process of the said changes. This helps in reducing the chances of customer dissatisfaction that leads to the risk of non-payment.

Agile Customer Service

A responsive customer support system is a valuable asset for any business. Customer services that cater to client issues and questions and work to resolve them with agility help in the overall customer experience.

Prompt assistance is always appreciated and adds to the customers’ confidence in making the purchase they may not have been completely sure about initially. With clients feeling satisfied and the company getting paid, it is a win-win situation.

How Billing in Arrears Works with SubscriptionFlow

Billing in arrears is a common practice in subscription-based businesses. SubscriptionFlow is no different when it comes to enabling businesses to provide services to customers before they are invoiced.

SubscriptionFlow is a potent billing software that administers multiple billing models, such as usage-based, where the level of service usage determines its cost. It works on an end-of-cycle invoicing system, commonly on a monthly or quarterly basis.

With SubscriptionFlow’s billing in arrears service, businesses can reduce churn, offer flexibility, maintain accurate billing, and provide exceptional customer service. These benefits help businesses scale and achieve their revenue targets. Let’s have a closer look.

Reduced Churn

Since SubscriptionFlow allows customers to pay after using the service and not upfront, it increases the chances of them purchasing the service or product over a long period. In turn, you can ensure customer loyalty and lifetime value.

Increased Flexibility

SubscriptionFlow makes it easier for businesses to adjust pricing and billing models according to their customer base and usage. Through this feature, they can accommodate various customer needs.

Accuracy in Billing

Using SubscriptionFlow’s billing in arrears service, you can maintain accuracy in billing as customers are charged according to their actual use. This authenticity and transparency encourage customer retention and loyalty.

Another noteworthy feature offered by SubscriptionFlow is the automation in creating and delivering invoices. You can facilitate a simplified billing process.

Exceptional Customer Service

When it comes to billing in arrears, customer service should be of top quality. SubscriptionFlow works to serve and facilitate customers at every stage of the payment process. It promotes a culture of fast and secure support service to its clients, ensuring that businesses get paid on time. Overall, it promptly manages any queries and issues faced by the client in the arrears billing process.