Last editedMar 20233 min read
Maintaining a healthy cash flow is essential for small business owners. An efficient invoicing system keeps the money flowing in to pay your own bills. One of the first decisions to make is whether to send out your invoices in arrears or in advance. We’ll discuss the basics of billing in arrears, including best practices to minimise late payment.
What is the invoice in arrears meaning?
An invoice in arrears describes any invoice sent out after a service has been provided. While some businesses bill customers in advance, many wait until the project is complete before sending the bill. For example, imagine you use a roofing company to repair wind damage. Once they’ve repaired the damage, they will request payment. This is because it’s difficult to send an accurate bill before they’ve seen and repaired the damage. From the customer’s end, it’s preferable to see the result rather than paying for something sight unseen. The invoice in arrears meaning simply refers to the invoice itself, sent after providing goods or services.
When should you send an invoice in arrears?
For some industries and business types, billing and being billed in arrears comes as standard. For example, freelancers who charge by the hour will usually ask for payment in arrears rather than in advance. This is because it’s difficult to know the total number of hours worked until after the fact. Paying after the fact ensures accurate compensation. Independent contractors, businesses that use sales commissions, and restaurants are typically paid in arrears.
As for invoice timing, it’s best to send your invoice immediately upon delivery of goods or services. This not only keeps the work fresh in your customer’s mind but reduces the chance of delayed payment.
What are the advantages of billing in arrears?
There are plenty of reasons to consider being paid in arrears. As we’ve mentioned above, your invoices will be more accurate and reflective of the work completed. It prevents the need to issue a refund if you overcharge your customer using an estimated invoice. It also prevents the need to issue additional bills if you’ve undercharged them.
Arrears billing is more flexible for both business and customer, with extended payment terms appreciated by clients. You can extend credit and split the full invoice amount into a series of recurring payments for greater flexibility. This in turn improves your customer relationships.
What are the challenges of being paid in arrears?
Of course, there are also a few risks or challenges to be aware of when sending an invoice in arrears. The first is the toll it takes on your cash flow. A business needs to front the cost of any materials, supplies, and labour involved with delivering its services. It then doesn’t receive payment until later, so it’s important that your accounting system is able to manage cash flow delays.
Another challenge to overcome is the risk of late or missing payments. Even with payment terms clearly defined on your invoices, some customers might miss the due date. You’ll need to keep on top of payment reminders and follow-up.
Billing in arrears: best practices
You can mitigate the risks mentioned above by adhering to invoicing best practices.
Ask customers for a partial advance payment or down payment to manage your cash flow.
Conduct credit checks on new clients if you plan to ask for significant sums in arrears.
Use accounting software to keep on top of payment collection and invoicing.
Use an automated system for sending late payment emails and other reminders.
While billing in arrears offers plenty of flexibility, a good tracking system is vital to your cash flow. It’s more important than ever to accurately track expenses and income in your accounting books. This ensures you won’t miss any payments received, so you know where to focus your collection efforts. Consider using cloud-based software like Xero or QuickBooks to issue and track invoices while balancing the books. GoCardless integrates with these as well as hundreds of other partners for full visibility over incoming payments. We also make it easy to be paid in arrears using Direct Debit for recurring payments and Instant Bank Pay for one-off invoices or other additional fees. Take control over payment collection to ensure a smooth, stress-free experience for both you and your customers.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.