Billing Cycle: Definition, Types, Length, & Examples

A billing cycle is a time interval between billing statements issued by a business or vendor. Goods, services, and products related to financial gain typically come with billing statements.

Understanding how a billing cycle works is necessary if you offer any of the services described above. Knowing when and how to issue a billing statement keeps your business from losing profit and revenue.

Keep reading if you’re eager to learn how to establish an efficient billing frequency to control your sales and income!

Key Takeaways

• A billing cycle is the interval between fulfilling an existing billing statement and issuing a new one.
• Billing cycles can occur weekly, biweekly, monthly, quarterly, or annually.
• When choosing a billing period, businesses and vendors must consider the nature of their products and services, as well as their customers’ needs.
• A well-managed billing frequency is supported by a set of clear invoice payment terms, seller flexibility and consistency, and an automated invoicing process.

What is a Billing Cycle?

A billing cycle, also called a billing period or billing schedule, is the time period between the date the customer completes the last billing statement and the next date the seller issues a new bill.

Sellers issue these billing statements recurringly to charge their customers or fellow vendors for their services or products.

Most billing cycles take as long as a month to complete, but they may be shorter or longer depending on the nature of the service and the agreement between the customer and the vendor.

For instance, if a credit card billing cycle starts on March 22nd and takes 28 days to complete, the billing period ends on the 25th of April. A new credit card statement cycle then begins the following day.

How Does a Billing Cycle Work?

A billing cycle follows a fixed number of days businesses use to determine when to issue a new billing statement to their customers.

The billing period begins when a vendor delivers goods and services to a customer and creates an invoice for the transaction. Once the customer or client pays, the cycle is completed.

Upon issuing a billing statement, sellers and companies grant customers a grace period to give them sufficient time to pay their dues. Grace periods vary by state.

Sellers may either complete a billing cycle instantly or not, depending on the type of service or goods sold. If the business offers subscription services, the billing schedule commences upon creating the customer’s or subscriber’s account.

However, if the business prefers that the billing statements for all customers begin on the same day, then they must prorate the new subscribers’ billing statements before a new billing period commences.

To help you understand how a billing period works, check out the billing cycle example below:

Billing Cycle Example

Let’s say you signed up for a Netflix account on March 15, 2024. Since the popular streaming service follows a monthly billing cycle, you will be billed for your subscription a month after creating your account.

As such, you should expect a notification and a billing statement from Netflix on or before April 15, 2024.

If you have health insurance, your provider may charge monthly premiums in exchange for medical coverage. Some insurance companies provide a grace period of up to 90 days to settle missed monthly payments.

How to Determine The Length of a Billing Cycle

Determining the length of a billing cycle is based on a few key factors, all of which are essential in enabling financial security for the business. These factors include:

Industry

Most billing periods follow industry standards. For instance, the billing period for credit cards, subscriptions, and utility services usually lasts a month.

On the other hand, wholesalers and vendors who sell custom goods can shorten their billing period by issuing a bill upon sending the goods to the buyer or customer.

Cash Flow

Aside from adhering to industry standards, businesses and sellers may also adjust the duration of their billing period to ensure a continuous and steady cash flow for their business.

Vendors and businesses may reduce or lengthen the billing period based on the setup that helps them manage their operational expenses and monthly budgeting plans.

Customer’s Creditworthiness

A customer’s trustworthiness in paying their bills determines their creditworthiness. Sometimes, when a seller encounters notorious late payers, implementing countermeasures to curb any more potential losses is a must.

These countermeasures include executing a late fee invoice policy and adjusting the grace period in a late payer’s regular billing cycle.

Types of Billing Cycle

There are five different types of billing cycles. Let’s discuss them one by one:

#1. Monthly Billing Cycle

A monthly billing cycle means that a seller or business issues one billing statement each month to their customers. With a monthly billing schedule, a customer’s total annual bill is broken down into 12 monthly payments or installments.

Utility service providers, banks, and SaaS companies that use tiered pricing for their services are examples of organizations that issue monthly billing statements.

#2. Weekly Billing Cycle

Employers who pay their workers hourly use a weekly billing cycle. The billing date may start at any date, but most companies use Monday as the start date to make it easier to track each employee’s work hours.

#3. Biweekly Billing Cycle

Biweekly billing cycles occur every two weeks and yield a total of 26 billing statements per year. Some SaaS businesses and companies offering streaming services use a biweekly billing period.

The biweekly schedule is also more frequently implemented by startups and mid-sized companies when paying employees’ salaries.

#4. Quarterly Billing Cycle

Customers receive a billing statement every three months or four times a year in a quarterly billing cycle. Unlike monthly billing schedules, quarterly billing models aren’t as popular or frequently implemented by vendors or companies.

Healthcare providers, insurance firms, and businesses that use a pay-as-you-go pricing model typically bill their customers quarterly.

#5. Annual Billing Cycle

Annual billing cycles entail a single payment each year.

It can be used in subscription-based services, wherein a customer’s billing cycle gets renewed yearly unless they cancel the subscription or close their account. Annual billing frequencies suit consumption-based pricing models and hybrid service packages.

3 Strategies for Managing Your Billing Cycle

We’ve enumerated three strategies that you can use to manage your billing cycle effectively. As a business owner, monitoring and adjusting your billing process is crucial as you accommodate more customers and offer more services.

#1. Establish Clear Invoice Payment Terms

Invoice payment terms with clear and complete information about your policies enable customers to see the full scope of their payment obligations. It would also be ideal to specify the corresponding penalties and consequences if customers fail to settle their bills on time.

Invoice payment terms should include the date when the invoice or bill was issued and specify the following details:

• Accepted payment methods
• Total amount to be paid by the customer
• Payment due date
• Any other payment conditions or agreements governing the customer’s billing statement

#2. Tailor Your Billing Schedule

Customers want flexibility in paying for the goods and services they purchase or use. Study your customers' payment behavior and compare it with your products.

Assess whether a longer or shorter payment schedule adheres to your business and your customers’ needs. Sometimes, allowing your customers more time to settle their bills can damage your business’s financial health.

You can use more than one billing period, particularly if you offer a combination of different pricing models.

#3. Use an Invoice Generator

An invoice generator lets you automate your invoicing process and monitor every transaction seamlessly.

Paystub.org offers a selection of invoice templates with a built-in calculator to help you keep up with each customer’s billing cycle.

As a result, you get more free time to follow up on outstanding payments, entertain new customers, and regulate your company’s finances.

Final Thoughts

Now that you know the meaning and definition of a billing cycle, you must have a better understanding of how choosing a billing cycle can affect cash flow in your business.

Remember choosing the most suitable type of billing cycle for your business entails considering your business type and your customers’ preferences.

You must also ensure you align your payment terms with your billing period of choice.

Finally, you must know when it is beneficial to adjust your customers’ pay frequency to prevent potential losses on your part.

Billing Cycle FAQ

#1. Can I change my billing cycle?

Yes, you can, but not without confusing your customers. Changing your billing cycle entails reviewing your contracts with your clients. It also requires assessing other aspects of your operations that will be affected directly by switching billing periods.

#2. How does a billing cycle affect payments?

A billing cycle affects payments in a way that guides sellers and businesses to know when to charge customers for their goods and services.

It also helps customers manage expenses, prepare payments, and know when to expect billing statements.

#3. What does a 1 to 2 billing cycle mean?

The ‘1 to 2 billing cycle’ is a term used to describe the period of time it can potentially take for specific changes and updates to a customer’s account to appear on their billing statement.

Let’s say a customer changed their subscription package midway through completing a billing cycle. As such, the updated amount they must pay for their new subscription should reflect after the completion of one or two billing periods.

#4. What is the billing cycle for a refund?

A billing cycle for a refund is the interval in which a vendor processes a customer’s return or refund request. It typically takes 7 to 10 business days or up to two billing cycles for a seller to credit the amount paid by the customer back to the latter’s account.