Billing Cycles Explained: How to Manage Payments, Expenses, and Revenue Efficiently
Billing cycles have a tremendous impact on your business, but they can be difficult to understand, set up, and adjust. Consult this guide to see how billing cycles work, why managing them is important, and how the right tools can simplify this often confusing process.
What is a billing cycle?
A billing cycle is a specific timeframe when you document all business expenses, purchases, or services. At the end of the cycle, you generate a statement of the services rendered, charges, and total due.
Billing cycles are related to statement periods and due dates. A statement period refers to the timeframe covered in a billing statement, and the statement date is the day you issue the invoice to the customer. The payment due date is when customers must make a payment to avoid penalties or late fees. For example, if a billing cycle runs from January 1 to January 31 (the statement period), the statement date might be February 1, and the payment due date could fall on February 15.
The length of the billing cycle can vary depending on the industry and business type, but it typically spans 30 days. Some industries, like utilities or credit cards, follow a monthly cycle, while others, such as subscriptions or SaaS (software as a service) providers, might have weekly, quarterly, or annual billing cycles.
How a billing cycle works
Understanding your billing cycle makes it easier to manage cash flow and create realistic budgets. While every organization has unique internal processes, billing cycles usually follow this workflow:
1. Set start and end dates: The start date of a billing cycle is when a business begins recording transactions, while the end date marks the conclusion of this period. Most billing cycles last 30 days, but depending on the business model, they can also be weekly, quarterly, or annually.
2. Monitor transactions: During a billing cycle, businesses record all purchases, payments, credits, and other financial activities.
3. Generate statements and invoices: At the end of each billing cycle, businesses generate statements or invoices detailing the charges incurred, payments made, and the balance due. The statement breaks down the individual products or services rendered, while the invoice shows the charges for those deliverables.
While billing cycles might not seem complicated, they can be challenging to manage at scale. As businesses grow, they need processes to ensure accurate billing that fits within their established terms with every customer. The right billing software can also be a major time-saver, automating everything from monitoring transactions to sending invoices.
Why understanding your billing cycle is critical for all business owners
Understanding billing cycles allows you to maintain a healthy cash flow, minimize expenses, and maximize profitability. Understanding your billing cycle can help you:
Improve cash flow management: A well-managed billing cycle helps you predict income and expenses more accurately, ensuring you have enough cash to cover operating costs.
Avoid fees and interest: All businesses have expenses. However, missing payment deadlines can result in late fees and interest charges that eat into your profits.
Negotiate better payment terms with suppliers: Billing cycles help you pinpoint when cash will enter a bank account, allowing you to negotiate better payment terms with suppliers. For example, you can ask for more flexible net 45 terms instead of net 30, especially if you have good supplier relationships.
Managing billing cycles in a subscription business
Subscription businesses use a range of different subscription pricing models, and each requires a unique approach. Still, managing efficient billing cycles ensures consistent revenue, minimizes churn, and optimizes cash flow. Follow these best practices to better manage billing cycles in your subscription business.
Streamline your recurring revenue model
Recurring revenue is the foundation of subscription-based SaaS success. Recurring billing provides predictable billing cycles for consistent cash flow, enabling more accurate budget forecasting. However, subscribers must be billed regularly, whether monthly, quarterly, or annually. Failure to bill customers on the predetermined schedule will damage customer trust and revenue stability.
Still, these revenue models do affect billing cycles and, as a result, your company’s financial health. For example, if you have difficulty budgeting for the entire year upfront, annual billing may not be the best option. However, if you prefer the predictability of upfront payments, annual billing could be a good fit.
Regardless of how you bill customers, automation is the best way to leverage a recurring revenue model. Use automated billing systems to streamline the entire process. Automation can even simplify the normally fraught process of offering multiple subscription options to users, such as monthly or annual billing, to balance customers’ expectations for convenience with business needs.
Align subscription plans and billing periods
Choosing the right billing period (monthly, quarterly, or annually) can significantly improve customer acquisition and retention. Monthly plans have a lower commitment, making them more attractive to new users, but they also carry more risk for your business. Annual payments are great for your business because they lock in cash flow and minimize churn, but not all customers are willing to pay in full upfront.
Regardless of which options you offer, be sure to align your billing periods with subscription plans. For example, if customers pay quarterly, consider switching to a 90-day billing cycle instead of a 30-day one.
Reduce churn with smart billing strategies
Churn is a natural part of any subscription business, but it’s still concerning. Smart billing strategies can keep churn rates in check. For example, consider letting customers choose their billing dates so they pay when it’s most convenient. Automated billing reminders before and after the billing date can also prevent forgotten payments and unnecessary late fees.
Automate payments and collections
Automation is also a must-have for payments and collections. The easier it is for customers to pay for their subscriptions, the more efficient your billing cycle will be. Opt for billing automation platforms to speed up this process. Seamlessly manage billing cycles at scale with subscription management tools like Zuora, which allows users to set up recurring payments with automated billing and offers multiple payment options. Zuora also integrates with your accounting software and customer relationship management (CRM) tool to simplify subscription management even more.
Have strategies for failed payments and dunning
Left unaddressed, expired cards and failed payments can lead to tremendous cash flow problems for your business. Set up automated retries to charge the customer’s card over a few days, and consider sending personalized emails asking them to update their payment information in the meantime. If that doesn’t work, many billing cycle solutions also integrate dunning — the process of asking customers to pay back the money they owe a company — in their workflows to automate recovery.
How Zuora can help businesses manage their billing cycles
Subscription-driven models are the gold standard for SaaS businesses, but their complexities can make it challenging to manage billing cycles. Zuora is a comprehensive solution for streamlining billing cycles, managing subscriptions, and optimizing revenue.
Master billing cycles through Zuora features such as:
Automated billing: Generate and send invoices automatically based on your billing cycles. Zuora supports multiple payment methods and can even offer prorated billing to adjust for mid-cycle upgrades.
Flexible pricing models: Don’t shoehorn customers into limiting packages. Zuora allows businesses to design flexible pricing options to accommodate varying customer needs, including usage-based pricing, tiered pricing, and discount management.
Revenue recognition compliance: Comply with standards like ASC 606 and IFRS 15 while aligning revenue recognition with billing and service delivery. Zuora keeps you compliant every step of the way with proper revenue tracking for financial reporting.
Payment recovery: Zuora’s dunning management features recover lost revenue through automated retries and personalized reminders.
Seamless integrations: Zuora fits within your existing tech stack. Integrate your billing management platform with Salesforce, NetSuite, and other solutions for end-to-end financial management.
Real-time reporting: Zuora reports provide immediate insights into how your business is doing, including key metrics for revenue, customer retention, and billing trends to help you stay one step ahead.
Billing cycles can feel complex, but Zuora’s smart automation and flexibly structured platform simplify everything for SaaS billing. Automate your business to reduce churn and unlock new revenue streams — all while saving time and effort. Learn more about Zuora Billing.
Billing cycle FAQs
How many days is a billing cycle?
Billing cycles are usually 30 days, but they can vary widely by industry and business model. For example, credit card businesses typically have 30-day billing cycles, while B2B companies can have cycles as long as 90 days.
What is an example of a billing cycle?
Let’s say a SaaS company needs to bill you for a software subscription. If you have a billing cycle from January 5 to January 30, you log all purchases and charges made during this period on a statement. On January 31, the invoicing system generates a statement of all transactions and their costs. If you have net 15 payment terms, the bill would be due on February 15.
How can I set up a billing cycle?
Businesses can choose a billing cycle by:
- Selecting a frequency: Based on customer preferences and cash flow needs, choose between monthly, quarterly, or annual billing.
- Choosing start and end dates: To streamline cash flow management, align billing due dates with your accounting periods.
- Automating invoicing: Use tools like Zuora to automate invoice generation and payment collection. Simply enter your billing cycle information into the software to automate the entire process.
How do businesses measure a billing cycle?
You can measure a billing cycle based on how long it’s been between two billing statements. A net 30 billing cycle means customers have 30 days from the invoice date to make a payment without penalty. For example, March 1 to March 31 might be a monthly billing cycle, so the next cycle would be April 1 to April 30.
