Everything you need to know about SaaS billing cycles
What is a Billing Cycle?
A billing cycle is the time between two invoice statement closing dates. It starts when you first bill a client and ends once the next bill is issued.
Clearly defining your invoice delivery dates is vital to maintaining healthy customer relationships and establishing trust. It also helps companies estimate how much revenue they will receive in a payment period. This is incredibly important when forecasting revenue for an upcoming business quarter or fiscal year.
Regular billing cycles also allow companies to keep up with cash schedules and budget their business expenses accordingly throughout the year. Instituting payment cycles ensures that they have enough capital to keep up with increasing business expenses.
Not only do they help companies keep up with customer renewals and invoices, but they make it easier for internal departments to monitor revenue that hasn’t been collected yet. This revenue, handled by accounts receivable departments, can build up in a phenomenon known as “revenue accrual.
What are the benefits of billing cycles?
Scheduling regular invoice send and receive dates speeds up the accounting process and turns your satisfied customers into champions for your brand.
Sticking to the practice of billing in cycles helps your company’s internal processes as well as your clients’. Clients can anticipate upcoming invoices and manage their budgets accordingly. In fact, late payments and negative cash flows are often the results of a poor billing structure.
Standardizing your billing dates also make it easier to keep track of the clients contributing the most to revenue accrual. This revenue monitoring helps companies determine the credit health of their clients through accounts receivable.
Finally, recurring payments hold companies accountable for their spending, because it acts as a built-in budget tool. Studies have shown that companies that see smaller but more frequent increments of cash flow save more money. A steady revenue stream encourages steady spending.
How many days is a billing cycle?
How many days a cycle lasts depends on the pricing strategy and products offered by a company, but they’re typically 30 to 45 days long.
If your company offers a monthly subscription, it will be more predictable. However, for sales-negotiated contracts, the date range could vary drastically. The billing cycle of a sales-negotiated contract will ultimately be determined based on the negotiated contract, as well as the specific pricing model offered.
In an annual contract, customers pay an annual fee. However, separate pricing variables such as usage, per-user seats, or individual licenses could be billed throughout the year. When building a sale-negotiated contract, be sure to take into account both pricing variables and negotiated terms. Then, adjust your billing cycle accordingly.
How to Set Up a Billing Cycle
The first step in creating a billing cycle is choosing who you want to invoice and what product or service you are billing them for. Depending on your company’s billing model, some products or services can be billed on an automatic or recurring basis.
The final step is the most important: selecting how often to invoice your clients. A shorter billing cycle is typically a better option for growing companies because it keeps their cash flow positive and allows them to keep up with company expenses like payroll, software, etc.
Measuring Your Billing Cycles
Once you’ve set up your billing cycles, you can start measuring them for success. In a B2B company, billing success looks like: a reduced A/R Balance, fewer days sales outstanding (DSO), and a faster cash collection process.
Finance teams can use analytics to determine your average DSO and see where failed or missed payments are causing more problems for your business. Using these insights, B2B finance teams can then ramp up dunning and collections efforts to maintain the efficacy of your billing cycles.
Billing Cycles and Revenue Accrual
Revenue accrual, or revenue that has been earned but not yet collected, is related to billing cycles because it’s used to document a company’s projected profits. It also helps companies stay GAAP compliant by recognizing revenue over time.
The concept of revenue accrual is essential when it comes to matching revenues with expenses. Without utilizing accrued revenue in the instances needed, companies would report rapid up-and-down changes in revenue and total profit each month.
This is because it’s impossible to document a consistent revenue stream without the revenue accrual method. Even though a company’s expenses stay the same, their month-to-month revenue would fluctuate rapidly using a cash accounting method.
How to record revenue accrual.
Revenue accrual is recorded in the accounting period in which the transaction of services occurred. So, even if your business has not received payment for a product or service, that revenue will still be recorded in a journal entry.
More specifically, accrued revenue is reported as an adjusted journal entry in current assets on a balance sheet, and it’s labeled as ‘earned revenue’ on a business’s income statement. Then, when payment is finally made, it is recorded as an adjusting entry to the asset account for accrued revenue.
So, What Now?
Well, it depends on whether or not your company has billing cycles set up for their products and services. After all, the benefits of implementing a schedule for customer payments include:
Cash flow improvement
Increased customer satisfaction
Ability to utilize automated accounting tools
Easily track revenue accrual