Billing Cycle

The billing cycle is the period between one billing statement and the next billing date that companies generate for their services and products sold to the customers. The customers make payments based on the bill invoices received from suppliers, and this cycle doesn't need to be monthly. It mostly depends on the type of service or goods sold.

This is extremely beneficial for organizations to maintain a steady cash flow. Most of the transactions in the real world are done via credit. Without billing, the cash that went out of the business for production will not flow in. So a steady billing cycle helps generate the working capital needed for the business.

• . Billing cycle refers to the time between one billing statement and the following billing date businesses create for the services and goods they sell to clients.
• The cycle that suppliers charge typically affects the billing cycle to clients. The company will require cash if the suppliers have a short billing cycle, which customers can satisfy if they pay.
• It typically occurs when the suppliers are consolidated and have access to the supply of raw materials. The billing cycles of consumers and suppliers must remain balanced for the business.

• Companies engaged in goods and service delivery mostly operate on credits. They sell goods and services to customers first and then generate bills after a certain period. Once the bill is generated, a grace period is allocated.
• The grace period expires on the due date. So if the payment is not made within the due date, the penalty could be charged, so future transactions with the customer may be stopped. After the due date, a new bill is generated on a future date that again has a grace period. So like this, the monthly or quarterly billing cycle goes on.

• The billing cycle of companies is properly mentioned in the agreement signed with the customers before the transaction. These are different in different sectors and are mostly dependent on the market strength of the particular company.
• It is normally done on a month to month basis but sometimes it may be quarterly billing cycle. However, it may be different for different goods and services or in different sectors.
• Cardholders need to understand and be familiar with the billing cycle date of their cards whenever they use them.

• Each industry has a specific billing cycle, and most companies follow it according to industry standards. There are scenarios where it is customized, and a company can follow its cycle depending on its market popularity.
• If the company is a big player in the market, they can follow a tight If the company is a big player in the market, they can follow a tight credit card billing cycle from customers, say 15 days. So after every 15 days, bills will be sent to customers for cash recovery. If the customers are powerful in the market, they are concentrated and can control demand; then the billing period can be more.
• The billing cycle date to customers often depends on the cycle that the suppliers are charging. If the suppliers have a tight billing period, then the company will need cash, which can be fulfilled if they receive payment from customers. It mostly happens when the suppliers are concentrated and can control raw material supply. The company needs to maintain a balance between the billing cycle of customers and suppliers.
• Companies often select the billing period based on the customer's goodwill. Suppose a particular customer has been doing business with the company for a long time and has never defaulted. Then the company will offer a longer billing cycle as he is not worried about the receivables being bad. So customers try to build goodwill in the market to receive favorable terms.

Hindustan Unilever (HUL) is a big player in the FMCG sector in INDIA. They keep a three months payable cycle and a 1-month receivable cycle. So they are so big in the market that their suppliers have customized their billing cycle as per the terms offered by HUL. After three months, they pay for supplies, and they receive payments from their customers within one month. This proves they are cash-rich. This is usually mentioned in a company's annual report and must be read thoroughly.

• This helps to teach discipline to the customers. Now customers are aware that they will have to pay for the company after every certain period. So it helps them to do budgeting accordingly.
• Billing helps customers to do an internal audit of their accounts payable. Each transaction recorded in accounts expected needs to be supported by an invoice. So bill generation will help customers to validate the accounts payable balance.
• There are several customers for an organization. It helps the organization to segregate good customers from the bad. If it is seen that a particular customer regularly fails to make payment within the due date, then that customer could be marked bad, and no future transactions can be carried with him.
• External auditors always require invoices to validate the balance in the Books of accounts. So regular bill generation acts as a proof for the transactions recorded and helps in case of any legal inquiry.

• It becomes tough to understand and estimate the revenue that can be collected because customers may delay the payment or default. Thus, the business does not necessarily receive cash or income even if the quarterly or monthly billing cycle is complete.
• The churn rate can increase because, similar the the above mentioned point, the customers may not pay up within due date or may pay and then discontinue with the subscription. This payment cycle gives them the time to change their mind regarding payment of continuation of purchase, due to which it becomes difficult for companies to understand the actual number of faithful customers.
• Due to the above problems the cash flow of the business is negatively affected.
• If the business is a purchaser and has to pay bills monthly billing cycle, the accounts department is under severe pressure to pay the bills.
• If the company is a big player in the market, they can follow a secured credit card billing cycle quarterly, then the interest that has to be paid for three months gets accumulated and the amount increases which is a waste of financial resource.
• For small business, if the sales is consistent, it is easy to handle the bill cycles. But for inconsistent or erratic sales, meeting the payment cycle becomes a huge problem because the  may not be enough or not come on time to meet the bills.

• The former is the time period starting from one billing date till the next billing date, whereas the latter is the final date of paying the bill.
• The former refers to a logn time period which may be a month, quarter or year whereas the latter refers to just one day.
• The former is fixed as per the purchase agreement whereas the latter may be extended through granting an extra credit period which may extend beyond billing cycle.

This has been a guide to what is Billing Cycle. We explain how to know it along with example, calculation, differences with due date, benefits & limitations. You can learn more about it from the following articles –

• Accounts Payable Cycle
• Days Payable Outstanding
• Days Working Capital
• Days Sales Outstanding
• Cook the Books