Whether you know it or not, you encounter billing cycles all the time. From your software subscriptions, office lease, and the regular business you do with vendors–you likely deal with them monthly, quarterly, and annually.
Knowing how billing cycles work can help you step your game up in managing cash flow and navigating upcoming expenses. Financial knowledge is power–which can help you improve your ability to strategize, project, and ultimately grow your business.
So let’s take it from the top and go over some billing cycle basics before diving deeper into strategies you can use to run your business more smoothly.
Here’s everything you need to know about billing cycles and how to use them to your advantage.
Billing cycle definition
A billing cycle or billing period is the time period between billing statements. Billing cycles are most often monthly, but depending on the industry, may vary between 3-6 weeks.
Understanding when a billing cycle begins and ends can help both businesses and consumers. For businesses, this information can provide guidance on when to charge customers and help to project revenue. For consumers, billing cycles set clear expectations for payment timetables, which can help with budgeting.
How long is a billing cycle?
A billing cycle is often 30 days, but lengths vary.
For example, higher-risk sectors like hospitality may have a seven-day or 14-day billing cycle with a food supplier. Rental equipment and credit can also be on cycles that are less than 30 days.
On the other hand, subscriptions for software and other services can be associated with longer cycles. In these cases, you would pay larger sums less frequently–say every six months or yearly.
Many companies offer longer billing cycles in exchange for a reduced price. For example, if you sign up for a Microsoft Office 365 subscription, you might have the option to pay $9.99 per month or $99 per year. If you paid for a year in advance, you would essentially get two months free.
Notes on credit card billing cycles
Credit card billing cycle dates range from 28 to 31 days. Check your exact billing cycle length on your credit card statement.
Credit card companies are required by law to make their billing cycles equal, but there is some leeway–around three to four days–for longer or shorter months. For example, your credit card payment date might be on the 23rd of the month, but your billing period might fluctuate slightly. This would allow for months with an extra day, like January, or those with fewer days, like February.
Credit card issuers generally do not charge interest on purchases if you pay your balance by the end of the billing cycle. This practice can save you a lot of money in the long run, as you won’t have to pay interest on your purchases if you pay them quickly.
It’s also important to note that a billing cycle differs from an account balance. A billing cycle indicates when purchases are made, while the account balance is the total amount you owe.
A credit card company does not require you to pay your entire account balance at the end of the billing cycle, only the purchases made within the billing cycle. Your account balance will be reported at the end of the cycle.
Credit card grace periods explained
Creditors typically offer a grace period after the official due date before interest and late interest and fees begin to accrue. The length of a grace period can vary considerably between creditors. Credit card grace periods, if offered, is 21 days minimum.
Other rules might apply if you have a grace period on your account. For example, a credit card company may offer a five-day grace period on non-cash transactions only and still charge interest on cash advances or withdrawals even if you pay off the purchase as agreed. The takeaway is that it’s vital to read the fine print of your agreement before you assume all grace periods are created equal.
The itemized details you see on your monthly statements consist only of the purchases you made during the billing cycle, plus the outstanding balance, plus interest, taxes, and fees, if applicable.
If you have yet to pay off your balance from the previous billing cycle, the balance will be added to your next billing cycle. However, unlike the itemized monthly statements you receive for each billing cycle, your previous purchases will not be detailed on the statement—only the balance.
3 ways to manage billing cycles to improve your business finances
When you know how to manage billing cycles, you can make moves to put yourself in a strong financial position. Here are three ways to do just that.
1. Review your business billing and invoicing cycles
While daily revenue and strong cash flow are ideal, they’re not the reality for many businesses. If there are periods where sales aren’t consistent, it can cause disruptions in the present and also affect your ability to pay bills months down the line.
Because your business’s invoice processing cycles can determine when money comes in. Adjusting your billing and invoicing cycles can potentially help improve cash flow. For example, you could change from net-60 to net-30-day terms.
2. Consider changing payment due dates to improve cash flow
Because payment due dates don’t always align with money coming in, know that you can also negotiate them to provide a little breathing room if necessary. The actual billing period would not change in these cases, but your payment due date would be different.
Every creditor has different rules regarding this practice, but if you feel it would help you manage your finances better, there’s no harm in asking. Most creditors will work with you to find a solution that satisfies everyone.
Here’s an example of how this could play out. If a billing cycle ends on the 20th of each month, you’ll know you have a payment due directly after that. You can look at your accounts receivable and budget the funds to pay that bill. If you need money to pay your bills by a specific date, you can adjust payment due dates to ensure that you have the funds on time.
3. Automate bill payments and keep your business credit score high
Automated bill payments can help whether or not you adjust billing cycle terms. While they won’t eliminate any cash crunches, they can help you steadily increase your business credit score since bills are being paid on time. They can also improve vendor relationships since vendors will know they can count on you for timely payments.
Another important factor to consider is your credit utilization ratio, which plays a big role in determining your credit score. Your credit utilization ratio is determined by dividing what you owe by your credit limit. That number is then represented as a percentage. For example, if you have a $10,000 limit and your account balance is $2,500, your utilization ratio is 25%.
Ideally, the reporting companies (Experian, TransUnion, Equifax) like to see a ratio under 30%.
Why is this important? Suppose you were planning to apply for credit to make a significant purchase for your business. In that case, your credit rating is a critical factor. Even if you have a perfect payment record, good income, and excellent credit history, a high utilization ratio could knock your score down a few critical points.
While your billing cycle does not directly impact your credit score, it can help you plan more accurately. Your creditors submit reports to the credit reporting agencies at the end of each billing cycle so that information is used to calculate and update your score.
If you know your billing cycle ends on the 15th, making a payment before the cycle ends could boost your score. When your creditor sends its reports to the agencies, your utilization will be lower, which can help.
A better credit score means you’ll have access to better rates and more purchasing power. Better interest rates mean the cost of borrowing is lower, while more purchasing power can help you grow your business or achieve a cherished personal goal.
Stay on top of billing cycles and keep cash flow strong with BILL
Knowing how to manage your billing cycles can help you improve your finances. BILL can help you better manage your finances by enabling you to:
- Get deeper insights into cash flow. Manage all your AP and AR in one dashboard.
- Automate bill payments to ensure you always pay on time.
- Pay and get paid faster with a wide variety of flexible payment options, including ePayments, credit card, check, and international wire.
Learn more about streamlining your business finances with BILL.
