What Is Billing in Arrears? 16 Best Practices

Whether a business is large or small, whether it operates in consulting or construction, the chances are it has had reason at some point to bill a customer after completing a job. This process of invoicing after work is finished is called billing in arrears. It offers multiple benefits to businesses but can also pose cash flow risks if businesses are not careful about how they invoice and follow up with their customers.

What Is Billing in Arrears?

Billing in arrears is usually the simplest way to invoice for ongoing or one-off services that might be difficult to predictably estimate because of expected changes in scope or variability in usage. It’s also the best understood and most trusted method of billing for consumers or business customers who want assurance that a vendor will deliver the highest quality of goods or services. As opposed to billing in advance, which asks for payment before goods or services are delivered, billing in arrears gives customers peace of mind that they can inspect the work product prior to payment.

Billing in arrears is also the only approach available to any business that extends credit to its customers, which is common in business-to-business (B2B) relationships.

Key Takeaways

• Billing in arrears assures customers that they can inspect work before making payment.
• Businesses that use billing in arrears don’t have to issue refunds or adjust invoices after the fact when a scope of work changes in the course of a job.
• Billing in arrears increases the risk of cash flow problems should customers demand long terms of payment, are late in payment or refuse to pay altogether.
• Automated billing processes can help reduce administrative overhead and minimise the risk of cash flow issues related to billing in arrears.

Billing in Arrears Explained

Contrary to common belief, “arrears” doesn’t necessarily mean overdue. It’s “the state of being behind in the discharge of obligations.” When billing in arrears, a company is billing behind — or after — delivering its product or service. Thus, even though the term “arrears” usually has a negative connotation because it’s used to refer to overdue items, “billing in arrears” is actually neutral. Even the timeliest payers, when billed in arrears, pay their vendors when invoiced following completion of a job. When a handyman writes an invoice on the spot after fixing a broken fence and the customer pays immediately, the transaction is an example of billing in arrears.

Billing in arrears is expected in many B2B and business-to-consumer arrangements and is a great vehicle for building trust with customers. It also assures a business that it will be billing exactly to the specifications of a job the first time around. However, it does bring financial risks when customers delay payment. Smaller businesses counting on big jobs that are billed in arrears could potentially face cash flow issues, especially if they must pay for goods or services in advance of completing the work.

Billing in Arrears vs. Advanced Billing

Billing in arrears contrasts with advanced billing, which occurs before or at the beginning of service provision. For example, a landlord expects advance payment for monthly rent, and many software-as-a-service companies and other recurring subscription services, such as mobile network carriers, also expect upfront payment. Such firms use advanced billing processes.

There are a range of trade-offs and standards for businesses to consider when choosing between billing in arrears and advanced billing. The following table presents the main considerations.

Other Billing Options

Billing in arrears and advanced billing are not the only models. Some businesses try to glean the benefits and mitigate the risks of those two options through alternate methods, like project billing(opens in a new tab). Here are three other ways businesses try to bridge the gap:

• Retainers: Businesses in areas such as consultancy, law, public relations and marketing frequently engage with clients through a monthly retainer. Retainers are typically billed in advance for a set number of hours. Some contracts allow for clients to approve additional ad hoc hours that are billed in arrears.
• Scheduled payments: Service businesses in fields such as design or software development will often establish payment schedules for specific engagements that trigger disbursements based on milestones or specified cadences. An app development project that uses this kind of progress billing(opens in a new tab) may have a client pay 25% upfront, 25% after architectural design, 25% after most major code gates have been completed and the last 25% after final testing and deployment.
• Initial deposits: Some service engagements (and orders of specialised goods) may require an initial deposit and then bill the final payment in arrears. This makes sense for businesses that create custom items or operate in construction, where the initial deposit helps pay for supplies needed to build or deliver the order. Initial deposits can also provide proof of good faith that the customer will eventually pay the full bill.

Advantages of Billing in Arrears

Billing in arrears is standard for many different industries because it provides businesses with a simple way to invoice and get paid for work without unnecessary complication. Here’s a deeper dive into four main advantages of the billing in arrears model.

Cash Flow Predictability for Consumers

While the ultimate cash flow impact for a customer will be influenced by many factors, consumers of a service that’s billed in arrears do get two distinct advantages. First, they pay later than they would under advanced billing, so there’s an immediate short-term cash flow gain. Second, they can be confident that the invoice they’re presented with is for all services, rendered in full. They don’t need to worry about future cash flow(opens in a new tab) issues that can arise in advance payment situations when the scope of work changes, requiring unexpected additional outlays after the original payment.

Reduced Refunds or Adjustments

When businesses bill after services and goods are delivered, they eliminate the need to cut refund checks for overpayment(opens in a new tab) when circumstances call for fewer hours or goods than estimated. Similarly, they won’t need to chase down additional payments to adjust for any scope expansion that arose in the course of the work.

Rectify Service Issues Before Billing

Billing in arrears allows businesses to assure customers that they’ll rectify any problems and deliver high-quality service before they ask for payment. This engenders trust and goodwill, and also gives businesses a reasonable way out of engagements without having to issue a refund if a client proves unreasonable or difficult to work with.

Better Alignment With Post-Service Payment Models

While prepaid subscriptions and upfront value-based fees are gaining ground in certain industries, such as technology services and healthcare, post-service payment models are the traditional path most consumers and business owners know and understand. You receive goods and services and then pay for them after delivery. Billing in arrears is the mechanism that facilitates these models.

Disadvantages of Billing in Arrears

There’s also risk that comes with billing in arrears, mostly having to do with clients who choose to delay or refuse payment. Here are four of the most common disadvantages to this billing method.

Cash Flow Challenges for Businesses

Billing in arrears can pose cash flow challenges for businesses as the payment process is frequently delayed by agreed-upon terms — net 30 days, net 60 days or even net 90 days in some instances — as well as by simple payment delays from the customer. When businesses must pay for normal overhead plus supplies and subcontracted services that were used in delivering an invoiced service, these delays can create a cash crunch.

Billing Adjustments

When the scope of work changes — particularly when it expands well beyond an initial estimate — businesses face the tricky task of billing in arrears with an invoice that exceeds what the customer expects to pay. These billing adjustments can strain customer relationships. If not handled transparently and with good communication and documentation as early as possible, they can threaten the final payment.

Risk of Nonpayment

Whether a business uses advanced billing or billing in arrears, such payment arrangements always include an element of trust. In the case of billing in arrears, the burden of trust rests on the business — there’s always the risk that a company will deliver its services and never get paid.

Administration and Tracking Efforts

Even when the company does eventually get paid, the administrative effort of invoicing, sending payment reminders and chasing down accounts payable departments to ensure that a bill is completely paid can become onerous. This is particularly true at scale, when a business must pursue many open invoices at the same time.

Industries that Use Billing in Arrears

Billing in arrears is a standard practice in a range of industries. Some of the most common industries include:

• Utilities: Electricity, gas and water services tend to bill customers each month after services have been delivered and usage is measured.
• Telecom: Telecom services like cellular phones, internet, cable TV and landline telephone service tend to bill in arrears in most instances. At least one U.S. mobile carrier uses a combination, billing line access charges in advance and data usage charges in arrears on the same bill.
• Healthcare: Most healthcare providers follow a traditional fee-for-service (FFS) payment model that leverages billing in arrears. Some providers, however, are shifting to upfront copays and value-based pricing, which also is sometimes paid upfront.
• Rental properties: Rent is almost always paid to landlords in advance of each month’s occupancy. Mortgages, of course, as with any loan, are paid back to lending companies in arrears.
• Credit card companies: Your credit card statement is typically billed in arrears for charges made each month. Most card terms stipulate a 21-day to one-month grace period after each billing cycle before payment is due — and interest begins to accrue on unpaid balances.
• Law firms: Many law firms bill for services in arrears but mitigate the risk of nonpayment through retainer agreements and upfront deposits.

16 Best Practices for Billing in Arrears

Billing in arrears is one of the most common invoicing and payment models in business today because it is a simple way to engender trust with customers and accurately invoice for exactly what was delivered. The following 16 practices can help businesses minimise jeopardy to cash flow and administrative overhead when using it.

1. Clear Documentation and Communication

Clear documentation of services and goods delivered, quick and precise communication about changes in scope and written confirmation from clients approving change orders reduce the risk of nonpayment or client dissatisfaction.

2. Automated Billing Systems

Automated billing systems(opens in a new tab) can reduce the administrative overhead associated with billing in arrears, streamlining the process of delivering invoices and reminding customers when payment is due — and overdue.

3. Consistent Billing Cycle

Consistent billing cycles add predictability to billing in arrears processes both for business stakeholders and customers. When a business always invoices on the first or 15th of the month, for example, payment tracking becomes more manageable for all concerned.

4. Prompt Invoicing

Invoicing(opens in a new tab) immediately after the delivery of goods or services is known to diminish the risk of nonpayment and accelerate payment cycles. It also tends to minimise the spread between job completion and payment that billing in arrears can sometimes cause.

5. Flexible Payment Methods

Offering multiple payment methods — all those your customers may wish to use, whether credit cards, bank transfers, instant electronic services like Zelle and PayPal, or even paper checks and monthly installment agreements — can build stronger relationships with customers by increasing their convenience — and the chances that they’ll pay on time.

6. Reminder Systems

Whether it comes from an automated billing system or a simple email script, reminder systems that tell a customer when payment due dates are nearing can help mitigate the risk of excessive invoice aging or nonpayment.

7. Detailed Invoices

Explicitly describing in the invoice the scope of services and goods delivered gives customers a clear understanding of what they’re paying for, boosting their confidence that the invoice is OK to pay. This is a good practice whether billing in advance or in arrears.

8. Transparency in Adjustments

As part of detailed invoicing, companies billing in arrears should be fully transparent about why and when they made adjustments to quoted prices. This minimises the risk of payment delays and disputed charges.

9. Maintain a Strong Customer Service System

Excellent customer service becomes a crucial resource when customers have questions or concerns. Strong customer support that resolves issues quickly not only increases customer satisfaction, but also decouples those concerns from a customer’s payment processes. In other words, customers become confident they can pay their bills and the business will still satisfy any outstanding issues.

10. Regularly Review Accounts Receivable

To successfully manage the potential cash flow crunches that can arise when billing in arrears, effective tracking and management of accounts receivable(opens in a new tab) are vital. Organisations should regularly review this asset on their balance sheets and seek ways to reduce invoice aging by sending follow-up reminders to customers with tardy payments and enforcing late fees. Another popular tactic is to encourage swift payment of invoices by offering a small discount for early payment.

11. Secure Data Storage

Any business that maintains a customer database — especially one that includes payment information and/or other personally identifiable information tied to customer accounts — must make the effort to secure that data. It’s important for protecting your business, building trust with customers and complying with regulatory mandates.

12. Feedback Mechanism

Incorporating feedback mechanisms into the billing process for customers to lodge disputes, ask for service follow-ups or provide other ideas can add a meaningful layer of customer care. Of course, it’s only meaningful if the business treats such feedback seriously.

13. Stay Updated with Regulations

As with any financial process, billing in arrears could be subject to regulatory scrutiny. Organisations should stay up to date with the rules and regulations that dictate when and how they bill customers, follow up on invoices and lodge late fees or other nonpayment consequences.

14. Reconciliation Processes

Disciplined organisations should have a robust reconciliation process(opens in a new tab) in place to record invoices, track accounts receivables balances, log payments and match everything to the company’s general ledger.

15. Document Nonpayment Consequences

Businesses can use consequences, such as late fees and termination of services, as a deterrent and enforcement mechanism for nonpayment. Organisations should document and inform customers about policies for nonpayment consequences and carefully track and communicate when customers are facing them.

16. Customer Credit Checks

Any business that bills in arrears should have stringent credit policies and criteria, and regularly monitor customers’ creditworthiness before extending credit to them. After all, billing in arrears is essentially that — an extension of credit.

Ensure Timely and Accurate Billing and Payments With NetSuite

While there is no guarantee that a business won’t have to deal with cash flow issues from late or nonpayment situations when billing in arrears, the right automated billing system can help by automating much of the administrative process of invoicing and tracking down payments. Better visibility into invoice aging and automated reminders for customers can increase payment compliance. NetSuite SuiteBilling provides a simple and automated system to help ensure timely and accurate billing and payments. It automates the management and billing of recurring subscriptions, for example, and has the flexibility to accommodate a range of flat, tiered or consumption-based pricing models. Furthermore, it autogenerates renewal invoices to improve subscriber retention. NetSuite SuiteBilling can help companies integrate billing and revenue management so they can more easily comply with accounting standards.

Billing in arrears is a time-tested method of requesting payment from customers after they’ve received goods or services. It offers small and large businesses an easy way to invoice for exactly the work done in a given time frame without having to issue refunds or additional adjusted invoices. When appropriately managed, the billing in arrears process doesn’t have to cause undue cash flow problems. Automated and timely invoicing, frequent reminders to customers and well-documented consequences for nonpayment can help mitigate the risks of billing in arrears.

Billing in Arrears FAQs

What is an example of billing in arrears?

One example of billing in arrears is monthly billing for electricity charges after usage has been measured and tallied.

What is an example of billing in advance?

An example of billing in advance is when a public relations or marketing firm charges a monthly flat fee for previously scoped services and invoices the client at the beginning of each month, before the work is actually performed.

What is the difference between billing current and billing in arrears?

Billing current means asking for payment in advance of all the work being completed, particularly if it is a predictable scope of work that the client assumes will be completed on schedule. Billing in arrears means asking for payment after work has been completed.

What does it mean to be paid one month in arrears?

Being paid one month in arrears means the customer is billed at the end of the month for work completed throughout that month and will pay within a month of invoicing.

Does arrears mean owing?

No, arrears means behind. It is sometimes used to describe a customer who is behind in payments and, therefore, overdue. But billing in arrears means that invoicing occurs behind, or after, work completion.