Cycle Billing

Article byNanditha Saravanakumar
Edited byShreya Bansal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Cycle Billing?

Cycle Billing refers to an invoicing approach whereby vendors or service providers charge customers on varying days, depending on the terms specified in individual customer agreements and the types of services rendered. This practice allows companies to maintain an even distribution of their billing workload.

Cycle Billing

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Cycle Billing (wallstreetmojo.com)

This billing method offers several benefits to businesses. It not only helps in managing their workloads more efficiently but also plays a crucial role in monitoring and managing the billing process. Companies can easily track which customers have been invoiced and keep tabs on those who have made payments, which is vital for effective financial management and maintaining positive customer relationships.

Key Takeaways

  • Cycle billing is an invoicing method employed by companies to bill their customers on different days within a month, as opposed to invoicing their entire clientele all at once.
  • This method offers several advantages, including even distribution the billing workload, and proper tracking and individual management of billing and payment receipts for clients.
  • When proper scheduling is implemented, along with the use of software and online tools, it becomes less susceptible to errors. In addition, it is a more adaptable approach.
  • It’s important to note that the term revenue cycle billing is distinct from a billing cycle.

Cycle Billing Explained

Cycle billing is a standard accounting practice used by companies to stagger billing their clients on different days. This approach aims to reduce the workload of billing the entire clientele in one go. By billing each customer on a different day and maintaining accurate records in the company’s database, it becomes easier to track and manage which customers have been invoiced and who have made payments. This method is distinct from the practice of a landlord billing tenants on the first day of each month.

Companies often employ various methods for cycle billing, including alphabetical order, order of invoice amount, and account opening date. In alphabetical order, customers from A to Z are billed, while some prefer to bill high-value accounts first. These methods primarily serve the company’s convenience.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Billing dates for customers often align with their account opening date, following billing periods like a month or a year, which is common in subscription-based services. Billing intervals may vary based on customer preferences and the nature of the business relationship, extending to 45 days, two months, or more for long-term relationships. Automated scheduling is used to facilitate adjustments when earlier payments are required due to economic conditions or creditworthiness.

Companies utilize invoicing software for efficient billing, payment management, and cost reduction. The billing cycle refers to the time between successive billing dates, which can be on a monthly, quarterly, or annual basis, depending on the customer’s service usage.

Examples

Here are a few examples to understand this concept.

Example #1

Suppose BizGoods is a supplier of raw materials to manufacturing companies and serves five clients: A, B, C, D, and E, each with a distinct billing date of the 1st, 6th, 11th, 16th, and 21st of every month, respectively. However, when client D encountered financial and legal troubles, including rumors of potential bankruptcy, BizGoods’ management made a strategic decision to adjust their billing schedule.

In response to the challenges faced by client D, BizGoods opted to shift their billing date from the 1st to the 2nd of each month for this specific client. This modification allowed the company to adapt to the evolving circumstances and provide more flexibility and support to client D during its financial difficulties. It is a practical example of how businesses can adjust their billing practices to accommodate individual client needs and respond to changing business conditions effectively.

This proactive approach demonstrates BizGoods’ commitment to maintaining a productive and supportive relationship with its clients while navigating challenges in the business landscape.

Example #2

Imagine a telecommunications company, TelCom Connect, which offers various service plans to its customers. TelCom Connect has thousands of subscribers with billing cycles ranging from the 1st to the 28th of each month, depending on when they initially signed up. However, as part of their customer-centric approach, TelCom Connect decided to implement a cycle billing system.

Under this hypothetical scenario, TelCom Connect shifts to this approach, ensuring that customers are billed based on the anniversary of their subscription activation. For instance, if a customer signed up on the 10th of a given month, they will be billed on the 10th of every subsequent month. This change allows TelCom Connect to evenly distribute their billing workload throughout the month evenly, ensuring a more efficient billing process and reducing the strain on their billing department. It also makes it easier for customers to understand and manage their billing, contributing to a more positive customer experience.

Double Cycle Billing

Double or two cycle billing is a method used to calculate interest on credit card debt. This approach involves averaging the outstanding balance from the previous two months. For instance, the interest in April is calculated based on the average balance of March and April.

In the United States, banks and financial institutions commonly employed this method until the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009. This legislation introduced various reforms to credit card practices but did not explicitly ban two cycle billing. One of the drawbacks of the two-cycle method is that if the outstanding balance increases in a particular month, it results in higher interest for two months, which could lead to increased costs for customers without their full awareness.

Conversely, the one-cycle technique is another interest calculation method, where the bank totals the daily ending balances, divides this sum by the number of days in the specific month, and then multiplies it by the interest rate to determine the interest payable by a credit card holder. To clarify, these are interest calculation methods and not invoicing strategies.

Frequently Asked Questions (FAQs)

1. What is full cycle billing?

The full cycle billing process refers to an accounting practice where the company or vendor invoices their clients on different dates spread over a month or such intervals. It reduces the workload since the companies follow an automated schedule and use online tools such as invoicing software to manage their clients systematically. Subscription-based sectors like entertainment, internet services, banking, etc., follow this method.

2. Is cycle billing regulated by any laws or regulations?

Yes, it is subject to regulation by various laws and regulations, depending on the country and industry. For instance, in the United States, financial billing practices are governed by the Credit CARD Act of 2009, which placed restrictions on specific billing methods. Businesses need to stay compliant with relevant laws and ensure they adhere to fair and transparent billing practices.

3.  Can cycle billing be adapted to different client needs?

Yes, it can be adapted to cater to different client needs. It offers flexibility, allowing businesses to customize billing cycles based on individual client preferences and the specific nature of the services provided. This adaptability makes it a versatile approach suitable for a wide range of businesses and their clientele.

This article has been a guide to what is Cycle Billing. Here, we explain the concept along with double cycle billing and its examples. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *