What Is Cycle Billing?
Cycle billing is the practice of invoicing different customers based on a schedule rather than billing all accounts at once on a single date.Statements are prepared and sent out at varying intervals, spreading out the company’s workload and making it easier for it to keep track of who has been billed.
Key Takeaways
- Cycle billing is a style of account management that enables companies to bill customers on different days of the month, rather than all on the same day.
- The practice allows the company to prepare and distribute statements on different days, versus having a glut of invoices that must be sent at the same time.
- Cycle billing enables companies to create a customized schedule that allows for easier tracking as to which customers have been billed, have paid, or have not paid.
- Strategies include invoicing for the largest amounts owed first, then the next biggest, and so forth; billing alphabetically; or billing based on the day of the month the customer's account was opened, or the customer chose to be billed.
- The lengths of billing cycles can vary customer to customer, based on what cash flow the company needs and the creditworthiness of a customer.
How Cycle Billing Works
Cycle billing is an invoicing strategy that involves billing a designated percentage of customers each day, as opposed to billing them all together, perhaps at the end of the month.
Companies that apply this technique may do so in a number of different ways. Methods include sending out invoices for the largest amounts outstanding on the first of each month, followed by the smaller billing amount on the second of every month or later.Customers may also be billed based on alphabetical order, the day of the month the account was opened, or the date the customer chose to be billed when establishing an account.
The date at which the cycle begins may depend on the type of service being offered and the customer’s needs. For example, a cable TV provider could opt to set a customer’s billing cycle to align with when that customer began service.
Cycle billing varies from the common practice of issuing all invoices on the same date. Single-date billing is typically used by businesses that have a common due date for services or rent. For example, an apartment complex may send a bill for rent on the first of every month, regardless of when tenants signed their individualleases.
With cycle billing, a company may bill on several days or every day of the month or over a longer period.
Advantages and Disadvantages of Cycle Billing
Cycle billing enables the supplier to flatten the volume of billing work to be completed on any given day, develop a customized schedule, and more easily track which customers have and have not yet been billed. Adopting this particular model may result in decreasedselling, general, and administrative expense (SG&A)costs since tracking the number of outgoing invoices becomes simplified and less prone to error.
On the flip side, the cycle billing technique may have a negative impact on cash flows as some invoices might be delayed several days from when they would normally be issued. In addition, a smaller vendor that struggles to keep track of invoices and money owed may find itself overwhelmed by having to keep up with different statements corresponding to different days.
Special Considerations
Businesses using cycle billing may establish different lengths of billing cycles. Vendors might shorten or lengthen the period of time between billings to manage cash flows or to adjust to a change in the creditworthiness of a customer.
For example, a wholesaler to a supermarket chain may need to accelerate receipt of cash flows because the company it leases delivery trucks from has tightened its billing cycle.Another example is a situation where a consumer electronic goods wholesaler has a late-paying retail chain customer. Because this account is riskier, the wholesaler could decide to reduce the billing cycle from four weeks to three weeks.
A billing cycle can also extend past a month, such as with a large corporate customer requesting a 45-day billing cycle for certain services. If the creditworthiness of this customer is sound, the vendor may agree to the longer cycle.
