The Billing Cycle Guide
Billing is the backbone of a business. Without regular cash flow, transactions can come to a halt, so having a sound billing strategy is essential for success. And one of the most important decisions you’ll make when strategizing is your billing cycle.
If your billing cycle is too long, you risk creating a cash bottleneck with late payments. After all, 15% of all B2B payments are late. But billing too frequently can also take up a lot of valuable time and could potentially flood customers with invoices.
Whether you’re new to accounts receivables (AR) or a long-time accounting professional, we’ve researched what readers like you are asking about billing cycles. Here is what we know.
Billing Cycles 101
Before we get into the more nuanced considerations, here is the basic information about billing cycles every AR professional should know:
What is a billing cycle?
A billing cycle is a time period between billing statements. While monthly billing cycles are common, some companies use quarterly or annual billing schedules. Having a regular, recurring billing period makes it easier to estimate revenue and know when to invoice customers. This, in turn, makes it easier to juggle inventory, bookkeeping, vendor payments, and budgeting.
How many types of billing cycles are there?
There are generally two types of cycles for payments:
- The billing cycle is how often your company requests payments. As a result, this billing cycle can be monthly, quarterly, or annually, or it may use a different time frame altogether. To make processes simpler, many companies use a monthly billing period.
- The accounting cycle is a monthly bill cycle focusing on calculating customer balance and recording that data.
But there are also different ways to bill a project:
- Retainers or subscriptions are used for ongoing services.
- Milestone billing breaks up a project into several smaller tasks, each invoiced separately.
- Completion billing is used for one-time projects and consultations. Generally, an invoice is sent once the project is finished.
- Sub-line billing is similar to milestone billing. In this case, sub-tasks for a project are billed separately. However, they do not represent specific milestones. This method of billing is most common in the construction industry.
- Progress billing is when you bill a customer as items are completed on a routine basis.
How long is a billing cycle?
Your billing cycle can be any length; however, if you have long billing cycles, it will often contain multiple accounting cycles. To simplify the process, businesses tend to merge these two periods. While regular, recurring payments tend to be more beneficial, there are some advantages to longer billing times:
- Convenient billing
- Long customer commitments
- Easier discount application
- Large, lump sum payments
Keep in mind, however, that late payments for a long billing cycle may put a strain on budgets, limit cash flow, and hinder forecasting visibility.
The Nitty Gritty
Here are some of the more advanced questions we’ve found about payments and the billing process:
How to find the billing cycle in my ERP?
Every major ERP should allow you to change your billing schedule. In most cases, you should be able to either:
- Create a billing cycle template
- Assign a billing cycle per invoice
But the process differs per ERP or accounting software. Here are two examples:
Netsuite has two billing applications. The first is through the regular billing portal. You can bill clients by creating an invoice or converting a sales order into a bill. If you have SuiteBillling, you can also create automated subscription packages for clients.
To create billing schedules, you need to go to Lists > Accounting > Billing Schedules > New. You will need to add some additional information, such as the name of the billing schedule, frequency, the initial billing amount, and payment terms.
The most efficient way to create billing schedules in Sage Intacct is to create billing templates. You can then apply templates to related contracts, so you don’t need to customize the billing fields for each individual template.
How are disputed balances settled?
Depending on your accounting platform, you may be able to accept partial payments, waive collections, apply credit, or chargebacks. Automated billing solutions can help avoid disputes and provide an audit trail by generating immediate and verified receipts.
This question actually delves more into strategy. You’ll need to determine which payment methods to accept before working out the different dispute resolution methods. For example, if you accept credit card payments, you’ll need to consider the chargeback process and what documents you would need to refute a dispute.
Depending on your team’s capabilities, you may decide that credit card chargebacks aren’t worth the hassle. You may then decide to nix the option altogether. Or you might shift the processing fee to the customer as a convenience fee to reduce costs and incentivize other zero-fee methods.
How can I improve collections?
There are two ways to improve payment collections without adding to your current workload:
- Implement a self-service payment portal.
- Create an automated collection follow-up sequence for late payments.
When you use these two strategies together, you only have to worry about a small number of delinquent payments and can reduce DSO time.
How can I use analytics to improve my billing process?
Without proper analytics in place, it’s hard to make a well-informed decision. You can get a more accurate view of company cash flow and payment data with a digitized or automated billing system. Three critical metrics to track are:
- Days sales outstanding (DSO) - This KPI essentially tracks how long it takes you to get paid from the invoice date. The higher the DSO, the longer it takes to collect payments.
- Accounts receivable turnover ratio (ART) You can use this metric to determine how effective your collection rates are. In contrast to DSO, the higher your ART rate is, the better.
- The number of invoicing disputes - If your invoicing system results in many errors or issues, there may be a problem with your system or process. Not only are corrections time-consuming and costly to handle, but it also affects relationships with customers and can hurt the bottom line.
Keeping track of these and other metrics can help you improve your overall payment strategy.
The Future is Automated
As the Venmo of B2B transactions, we understand how traditional billing systems work—and how they can be. Instead of laboring over small, repetitive details, billing can be largely automated. With customer self-service payment portals, an extensive bank network, and in-depth customization, it’s possible for businesses to reduce their DSO while cutting costs.
When looking at specific numbers: We’ve cut DSO by 60% and the cost of receivables by 50%.
Paystand allows any organization to automate and customize their entire accounts receivables lifecycle, including your billing cycle. And with enhanced, near real-time analytics, you can get accurate data and improve your payment strategy.
But the thing is that automation isn’t just about reducing costs. It’s about saving time. Time your professionals can use for higher-value, business-objective tasks instead of data entry.
Book a call with our payment experts today to discover how Paystand can transform your AR operations.