Billing Cycle

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.
Billing Cycle

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Source: Billing Cycle (wallstreetmojo.com)

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

Benefits

Conclusion

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.

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