What is Cycle Billing
Cycle billing is the practice of invoicing different customers based on a schedule rather billing all accounts at once on a single date. While both are examples of billing cycles, cycle billing may employ any number of different methods such as 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 or the day of the month the account was opened, or the date the customer chose to be billed when establishing an account.
BREAKING DOWN Cycle Billing
Cycle billing allows companies to develop a customized schedule and more easily track which customers have and have not yet been billed. Such a system may result in decreased SG&A costs since tracking the number of outgoing invoices becomes simplified and less prone to error. Cycle billing may or may not help a company produce more consistent cash flows depending on if it extends the time required to collect payments.
Cycle Billing Provides Flexibility
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 individual leases.
With cycle billing, the date at which the cycle begins may depend on the type of service being offered and customer’s needs. For example, a cable TV provider may set a customer’s billing cycle to align with when that customer began service. With cycle billing, a company may bill on several or every day of the month or over a longer period.
Frequency of Cycle Billing
Businesses using cycle billing may establish different lengths of billing cycles. Vendors may shorten or lengthen their billing cycles 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 for the wholesaler. Another example is a situation where a consumer electronic goods wholesaler has a late-paying retail chain customer. The wholesaler may reduce the billing cycle from four weeks to three weeks for this riskier account. A billing cycle may 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.