There are two main billing processes that companies can use to receive payments from customers or clients. These are billing in advance, where you receive payment before delivering your products or services, and billing in arrears, where payment is received after providing your goods.
The billing process you choose directly impacts your cash flow, or the money you have available at any one time to pay bills and re-invest for growth. This means it's really important to understand which process is right for your business. Here's a closer look at how payments in arrears work.
Understanding payments in arrears
Common examples of payments in arrears include staff salaries, utilities, and professional services like accountants and lawyers. The term 'arrears' is also used to describe overdue payment, such as when a client fails to pay an invoice within the agreed time period.
What does it mean to be paid in arrears?
Payments in arrears can increase the likelihood of sales because it's beneficial for your customers to pay you later and review your work before submitting payment. However, payment in arrears delays incoming cash, increasing the risk of insufficient funds for ongoing expenses.
"When a company bills their clients or customers in arrears, they are effectively offering a credit facility to their clients," explains Riz Wasti, director of 2e Accountants. "Therefore, they should do credit checks and place an upper limit on the credit offered, to reduce their risk." You could, for example, check your client's credit scores, to ensure they are trustworthy and likely to pay you. The downside of this is that it would involve additional administrative costs for your own business.
Being paid in arrears also means your business is effectively spending money before making money, as you will be allocating resources to a project before you have been paid. This does carry the risk of delayed payments from clients or the much larger risk of defaulted payments on work you've already undertaken. On the other hand, it can help to close a deal.
Conversely, paying another company in arrears has lots of benefits, such as improving cash flow and increasing the ability of your company to invest in other projects, Wasti notes. "It also increases a company's working capital and gives it the ability to increase revenue and invest in expansion," because you have more time to receive the money you're owed and make more sales.
The American Express® Business Gold Card offers business owners a payment period of up to 54 days, which means you can keep money in your account for longer, allowing you to manage your cash flow with greater flexibility¹. What's more, for every full and eligible £1 used on business spending, you'll gain 1 Membership Rewards® point, redeemable with hundreds of online retailers across travel, retail and dining².
In arrears, current and in-advance payments
Alternative billing processes to payment in arrears include in-advance and current payments. Let's look in more detail at how these differ from payments in arrears.
Payment in advance
Paying in advance means receiving payment from your customers before providing your goods or services. The benefit is that you have more cash available upfront, putting less strain on cash flow. However, it relies on a degree of trust from your client and some may not agree to this. Instead, you could consider requesting a deposit or staged payments.
Current payment
Simply, current payment is where an employee's wages are paid over the weekend or shortly after on a monday. This usually means that a person's salary includes some hours already worked and some that are forecast, as you're submitting their hours before their working week is finished. This can lead to errors as you don't get any extra time to calculate benefits, taxes or overtime.
Whichever billing process you choose, it's crucial to ensure you're accurate and efficient at managing payments and balancing cash flow. "We fully automate both the billing and invoicing of customers and the payments to service providers," says Rabheru, for example through automated email and SMS payment reminders. "We can therefore ensure service providers are paid correctly, fully, and on time."
Types of payment in arrears
Salaries
Staff salaries are usually paid in arrears, typically at the end of the month after an employee has completed their work. Here, payment in arrears supports greater accuracy in payroll, since it allows companies to factor in calculations such as overtime, commission and tips.
Suppliers
Suppliers often request payment for their goods post-delivery. Wasti notes that in general, arrears payment periods tend to be about 30 days. If you're requesting payment in arrears, he notes, it's best to send an invoice as soon as you've delivered your products. This increases your likelihood of being paid on time.
Service providers
Service providers, such as utilities, cleaners, and plumbers all tend to bill in arrears. A gasworks engineer, for example, will bill you for boiler servicing after completing the work.
You are usually asked to pay phone bills at the end of the month, too. When work is based on usage and billed hourly, paying in arrears means that instead of predicting usage or hours, you can bill for the exact amount, avoiding errors and over or underpayments from clients.
Business credit and charge cards
Although very different, business credit cards and business charge cards share the function of providing a credit facility, which means you don't pay them until after you've made purchases.
Example of using payment in arrears
Housekeep, an online platform that connects customers to UK home service providers, such as cleaners, plumbers, and electricians, uses both advanced and arrears payments depending on the size and type of jobs it provides to customers.
“Our jobs can range from small, high certainty jobs, such as a move-out clean; to large, uncertain jobs, such as building work,” says Avin Rabheru, MBE, Founder and CEO of Housekeep. "Smaller jobs tend to be priced and billed up-front, whereas the larger jobs often involve a quote with staged payments which can be both in advance and in arrears," he says.
Housekeep also makes most of its payments in arrears, such as to its service providers after jobs are finished and to head office for overhead costs.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.