Most of us are likely to be familiar with the term ‘billing’ owing to its use in everyday speech.
But if you’re running your own business, it’s essential to delve into a more technical understanding of the concept.
The standard accounting definition of billing describes it as the process of generating invoices for customers on a recurring or one-time basis, depending on the type of pricing plan that a customer has chosen.
In this guide, we will be going over what billing means, why it’s important, the step-by-step billing process, along everything else you need to know about billing for your small business accounting.
Read on to learn about:
- What Is Billing in Accounting?
- Importance of Billing For Businesses
- The Billing Process in Accounting (3 Main Steps)
- Types of Billing
- How to Improve The Billing Process
- What Is Billing FAQ
What Is Billing in Accounting?
Billing is defined as the step-by-step process of requesting payment from customers by issuing invoices. An invoice is the commercial document businesses use to request payment and record sales.
More specifically, an invoice includes the name of the product a buyer purchases, the products’ pricing and payment terms, and the buyer and seller contact information.
You can learn more about the elements of an invoice and how to create one from scratch by heading over to our guide on how to make an invoice.
Importance of Billing For Businesses
The most basic use of billing is to keep a record of all sales that happen within the business. However, there are many other purposes and benefits of billing, that include:
- Inventory Tracking. If your business sells merchandise, billing helps you keep track of how much inventory is actually available for sale, whether or not the client order has been fulfilled. You’ll also be able to use this information to plan and forecast the amount of inventory your business will be needing in the future.
- Accurate bookkeeping. Billing records when a good or service is sold, to who, for how much, and when it’s due. This way, both the buyer and the seller are able to track their payments accurately and keep outstanding invoices from becoming overdue.
- Generating valuable insights. By keeping a daily record of bills and invoices, you’re able to use the data to find out your most in-demand goods, peak buying times, customer buying patterns, and so much more. Long-term, this helps you develop useful marketing strategies for your business.
- Legal evidence. Issuing an invoice is an essential step in the billing process since it acts as legal proof for the sale. Not issuing an invoice can cause your business issues with collecting payments for the services or products provided.
The Billing Process in Accounting (3 Main Steps)
The billing process can be broken down into three main stages:
1. Review Billing Information
The very first step is reviewing your billing information.
Reviewing requires a business to collect and analyze all the information needed in order to create an invoice or bill.
Practically, it involves checking all product codes and corresponding prices, verifying taxes, adding freight charges, and confirming pre-discussed payment terms, wherever applicable.
The billing info to be reviewed will differ a bit depending on whether your business provides physical products or services.
2. Generate the Invoice
After all the necessary financial information about the sale has been collected and reviewed, it’s time to put the data together and create your invoice.
Now, you can either design your own invoice template from scratch or choose a premade template that you can personalize with your brand colors and logo. Both Word and Excel provide a gallery of templates, where you can type “invoice” in the search box to get access to the invoice templates.
These Word and Excel invoices may be free and easy to access, but the cheapest option is not always the best one for your business.
For starters, free templates aren’t very professional-looking and can be hard to customize. One small change causes the entire format to scramble, and you end up wasting your office hours creating invoices, rather than managing your business.
That’s why most businesses nowadays opt for accounting and invoicing software to automate the process of making an invoice. With invoicing software, all you have to do is go to the invoice generator, choose the invoice template you like best, customize it with your brand colors and business information, and press send.
3. Send Out the Invoice
Invoices can either be delivered physically through snail mail and fax or by writing an invoice email with the document attached.
The traditional postal office method isn’t very convenient, as it can be slow, time-consuming, and unnecessarily costly. The extra expense of paper, ink, and postage, can be easily avoided by sending an email attachment instead.
If you want to save even more time and effort, another option is to send your invoice email through invoicing software. All you have to do is create the invoice, and then press the built-in Send button, for your email to be immediately delivered to the customer.
There’s no need to worry about writing down a subject line, email body message, and manually attaching the invoice pdf file - invoicing software does everything for you.
For more advice on sending invoices and tips on how to get paid on time, head over to our guide on how to send an invoice.
Types of Billing
Depending on the type of financial activities your business takes part in, there are a variety of billing mechanisms you can choose to offer.
Here are some of the main types of billing small business owners deal with during their day-to-day operational activities:
1. Milestone Billing
As the name suggests, this type of billing method requires the completion of a milestone (which could be a particular event or a sub-contract). It is this milestone completion that is given a billing value. An invoice is generated and issued when this event occurs.
2. Progress Billing
In this billing method, invoices are generated in tandem with costs incurred on a routine, monthly, or bi-monthly basis. Therefore, cost recovery is complete before delivery.
3. Sub-line-item Billing
Here, invoices are generated as sub-items of a larger process (such as various parts of a construction process). Such a billing method helps strengthen cash flows. This is seen in the form of a proforma invoice, which is a preparatory bill sent before work is finished.
4. Billing on Completion
This type of billing method is popular in cases with a fixed fee or a one-time service. The payment is made when a service has been provided, or a product or project is delivered. This type of billing is very frequent for businesses offering retail services on restaurants, grocery stores, shopping centers, and so on.
5. Billing for On-going Services
A recurring payment plan is often the best option for on-going services such as online subscriptions, software plans, etc. It ensures a consistent flow of cash into one’s business. The frequency may be weekly, monthly, or even longer depending on the nature of the service or cash flow expectations.
If you’re a subscription-based business or offer specific services for a monthly fee, then this type of billing is likely the best option for you. With cloud accounting software, you can completely automate the process, and set up recurring invoices so they get sent automatically at a fixed interval of time.
6. Prorated Billing
This particular type of billing charges customers based on the cost per day. Customers, therefore, only pay for the number of days that they used the service. In many cases, this can encourage more customers to decide to buy a service or a product because canceling earlier would not lead to overcharging.
Want to learn about the different types of invoices you can issue, what elements they contain, and when it’s best to use each one? Then check out our full guide on invoice types, for more information.
How to Improve the Billing Process
For a small business, billing can be a tedious process. Being a crucial part of any business, it is imperative to have an efficient billing system in place.
1. Set Clear Payment Terms
Setting clear payment terms on your invoices increases the likelihood of receiving quick payments.
Make sure you include clear details about when the payment is due, along with your preferred method of payment such as cash, check, credit card, or any other. Also, if you charge late fees or offer early payment discounts, you need to add that information here too.
2. Send the Invoice Fast
Invoices are best sent immediately after a good or service is delivered. Make sure your customers are happy with your service and that there weren’t any order issues, and then bill them as soon as possible.
At the end of the day, the faster you send, the sooner payment is received.
3. Automation
Most parts of the billing process can be automated using simple tools or software. This includes invoice generation, overdue invoice reminders, automated payments for recurring fees, etc. You can even use free invoice templates to speed up your billing.
4. Switch to Better Software
It seems to be a common (and justifiable) notion that using spreadsheets can be bad for business. It is not only time-consuming but also leaves room for error. Therefore, investing in a good billing software or billing system can prove to be extremely beneficial. In addition to essential billing tools, a software billing system can pack in ERP features or recurring payment options. Cloud-based invoicing software is also worth considering.
5. Intelligent Integrations
Expanding on the previous advice - it’s essential to pick billing or invoicing software that is open to integrations with other tools. Perhaps you’d like to integrate your CRM with your billing software. Or maybe you’d like it to integrate it with your email. The best billing software enables you to work faster and smarter with intelligent integrations that make billing easier and hassle-free.
What Is Billing FAQ
#1. What’s the Difference Between an Invoice and a Bill?
For transactions that are completed in one go, it’s more common to use a bill as documentation. This happens because a bill is short and less detailed than an invoice would be, and includes only important details regarding prices and taxation. For example, you can think of billing done at restaurants, pharmacies, beauty salons, or anywhere where you can purchase goods or services in person.
Invoices, or sales invoices, on the other hand, are commonly issued for products that get sold on credit or that are recurring. So, when a customer doesn’t pay for a good or service on the spot, businesses issue invoices instead of bills. An invoice will contain extra elements such as payment terms, a due date, contact information, a detailed description of the goods and services, and more.
If you want to learn about the differences between a bill and an invoice, head over to our guide on bills vs invoices, for more information and a comprehensive comparison chart.
#2. How Much Time Should You Give Clients to Pay an Invoice?
A widespread payment term businesses use is net-30, which basically means that your customer has 30 days to pay back.
With that being said, there’s no straight answer for every company - payment terms depend on different factors such as your business’ industry, relationship with the clients, or total amount of the invoice.
#3. Is Billing Accounts Receivable?
As we’ve mentioned, billing is the process of generating and issuing invoices. Whereas accounts receivable is the asset account that displays the balance of any outstanding invoices or money owed to a business, in the short-term.
So, essentially, billing and accounts receivable are not the same things.
#4. What Is a Billing Cycle?
A billing cycle, or billing period, is the time period in between billing statements.
So, in simpler words, the billing cycle refers to the interval between the last billing date and the current billing date for any sale of goods and services. The length of this cycle varies from business to business, but it typically lasts between 20 to 25 days.
Key Takeaways
Obtaining timely and adequate customer payments is essential for any business. An efficient billing system forms the foundation for an integrated and streamlined payment collection process and is crucial to your accounting and bookkeeping process. Therefore, for a small business, billing often requires more investment (such as spending in billing or invoicing software) to improve efficiency and minimize losses.
Deskera is one of the most favored cloud software when it comes to a small business as it offers a very efficient and easy-to-use billing and invoicing software for small businesses.
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