DEFINITION of Billing Cycle
A billing cycle is the interval of time from the end of one billing, or invoice, statement date to the next billing statement date for goods or services that a company provides on a recurring basis. A billing cycle is most often set on a monthly basis but can vary in time length depending on the type of product or service rendered.
BREAKING DOWN Billing Cycle
Billing cycles guide companies on when to charge customers and help businesses estimate how much revenue they will receive. They also enable internal departments, such as the accounts receivable unit, to monitor how much revenue has yet to be collected. The recurring cycle also lets customers know when they can expect to be charged. At the end of a billing cycle, the customer has a certain amount of time to remit payment. This is the grace period that expires on the due date.
Examples of Billing Cycles
The date at which the billing cycle begins depends on the type of service being offered and the customer’s needs. For example, an apartment complex may send a bill for rent on the first of every month, regardless of when tenants had signed their individual leases. This style of billing cycle can make accounting easier, as well as make the payment due date easier for tenants to remember. Companies may also choose to use a rolling billing cycle. A cable TV provider may set a customer’s billing cycle to align with when that customer began service.
Determining the Length of a Billing Cycle
Although governed by industry norms regarding the length of billing cycles, vendors can shorten or lengthen their own billing cycles to manage cash flows or to adjust to a change in the creditworthiness of a customer. A wholesaler of fruits and vegetables to a supermarket chain, for instance, may need to accelerate receipt of cash flows because the company from which it leases delivery trucks has tightened its billing cycle for the wholesaler. Also, consider a situation where a consumer electronic goods wholesaler spots trouble with a retail chain customer. The wholesaler may reduce the billing cycle from four weeks to three weeks for this riskier customer. The flexibility of the billing cycle can go the other way, too. For example, suppose a large corporate customer needs to lengthen the cycle from 30 days to 45 days for software-as-a-service (SaaS). If the creditworthiness of this customer is sound, the vendor will normally agree to do so.