What is the Billing Cycle?
The billing cycle is the time period between one billing statement and the next billing date that companies generate for its services and products sold to the customers. Payments are made by the customers based on the bill invoices received from suppliers and it is not necessary that this cycle is monthly. It mostly depends on the type of service or goods sold.
How does it Work?
- Companies who are 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 of time. 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, then the penalty could be charged or future transactions with the customer may be stopped. After the due date, again a fresh bill is generated in a future date which again has a grace period. So like this, the cycle goes on.
How to Find Billing Cycle?
- The billing cycle of companies is properly mentioned in the agreement that is 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.
- Hindustan Uniliver (HUL) is a big player in the FMCG sector in INDIA. They keep a 3 months payable cycle and 1-month receivable cycle. So they are so big in the market, that their suppliers have customized their billing cycle as per the terms being offered by HUL. They pay to supplies after 3 months and they receive payments from their customers within 1 month. This proves they are cash-rich. This is usually mentioned in the annual report of a company and must be read thoroughly.
Calculation of Billing Cycle
- Each industry has a specific billing cycle and most companies follow it as per the industry standards. There are scenarios where it is customized and a company can follow its own cycle depending on its market popularity.
- If the company is a big player in the market, then they can follow a tight billing cycle from customers, say a period of 15 days. So after every 15 days bills will be sent to customers for cash recovery. If the customers are powerful in the market, that is they are concentrated and can control demand, then the billing period can be more.
- The billing cycle to customers often depends on the cycle that the suppliers are charging. If the suppliers have a tight billing period, then the company will be in need of cash and that can be fulfilled if they receive payment from customers. It mostly happens when the suppliers are concentrated and can control the supply of raw material. The company needs to maintain a balance between the billing cycle of customers and suppliers.
- The billing period is often selected by companies based on the customer’s goodwill. If a particular customer is 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 in order to receive favorable terms.
- This helps to inculcate discipline in the customers. Now customers are aware that after every certain period they will have to pay for the company. 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 payable 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 also helps in case of any legal inquiry.
This is extremely beneficial for organizations to maintain steady cash flow in the business. 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 in the generation of the working capital needed for the business.
This has been a guide to What is the Billing Cycle & its Definition. Here we discuss the calculation period and billing cycle and how to find this along with benefits and how it works? You can learn more about from the following articles –