What is the Billing Cycle?

How does it Work?

  • Companies 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. Once the bill is generated, a grace periodGrace PeriodGrace periods are extra days given after the due date to undertake an unfulfilled obligation without penalties. They are a common instance in the financial world and are usually offered to clients who apply for a credit card, student loan, insurance, or mortgage to attract more customers.read more 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, so future transactions with the customer may be stopped. After the due date, a new bill is generated on a future date that again has a grace period. So like this, the cycle goes on.

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How to Find Billing Cycle?

  • The billing cycle of companies is properly mentioned in the agreement 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 Unilever (HUL) is a big player in the FMCGFMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more sector in INDIA. They keep a three months payable cycle and a 1-month receivable cycle. So they are so big in the market that their suppliers have customized their billing cycle as per the terms offered by HUL. After three months, they pay for supplies, and they receive payments from their customers within one month. This proves they are cash-rich. This is usually mentioned in a company’s annual report and must be read thoroughly.

Calculation of Billing Cycle

  • Each industry has a specific billing cycle, and most companies follow it according to industry standards. There are scenarios where it is customized, and a company can follow its cycle depending on its market popularity.If the company is a big player in the market, they can follow a tight billing cycle from customers, say 15 days. So after every 15 days, bills will be sent to customers for cash recovery. If the customers are powerful in the market, 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 need cash, which can be fulfilled if they receive payment from customers. It mostly happens when the suppliers are concentrated and can control raw material supply. The company needs to maintain a balance between the billing cycle of customers and suppliers.Companies often select the billing period based on the customer’s goodwill. Suppose a particular customer has been 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 goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more in the market to receive favorable terms.

Benefits

  • This helps to teach discipline to the customers. Now customers are aware that they will have to pay for the company after every certain period. So it helps them to do budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more 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 payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more 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 auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more 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 helps in case of any legal inquiry.

Conclusion

This is extremely beneficial for organizations to maintain a steady cash flow. 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 generate 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 it from the following articles –

  • Accounts Payable CycleDays Payable OutstandingDays Working CapitalDays Sales OutstandingCook the Books