Glossary Hub / Billing in arrears: benefits, challenges, and best practices
Billing in arrears: benefits, challenges, and best practices

Many factors affect a company’s profitability, from employee engagement to the quality of its products or services. When and how your business bills customers can have a tremendous impact on cash flow, affecting everything from employee payroll to investing in the business.
Billing in arrears is a common billing model where customers are invoiced after delivering a product or service. While this method fosters trust and allows businesses to charge based on actual usage or performance, it also presents challenges, such as managing cash flow and mitigating payment delays.
In this article, we’ll explore the ins and outs of billing in arrears, including what it entails, why businesses use it, and how it compares to other methods like billing in advance. We’ll also dive into the benefits and challenges of this billing model and share actionable best practices — such as leveraging innovative solutions like Zuora — to reduce risk and streamline your processes.
What is billing in arrears, and how does it work?
Billing in arrears is a billing strategy where businesses invoice customers after delivering a product or service. Instead of asking customers to pay upfront or on a set schedule, they pay after goods or services are rendered.
This strategy is best for companies with usage-based pricing, such as utilities, restaurants, eCommerce businesses, or services like freelance graphic design. Billing in arrears means a business charges clients based on usage or when the project is completed.
Instead of charging based on inaccurate estimates, which can complicate the invoicing process and hurt customer relationships, billing in arrears simplifies the process by charging customers only for what they need.
Billing in arrears follows a simple process:
1.Usage tracking: The business delivers the product or service to the customer. During this time, employees track usage, products, and orders. Depending on the business model, usage could include tracking work hours or units consumed.
2.Invoicing: Once the business delivers the product or service, it sends the customer an invoice detailing services rendered.
3.Payment: The invoice asks the customer to pay by a certain date, usually within 15 to 30 days of receipt.
The upside of billing in arrears is that clients only pay for what they need. However, this arrangement can hurt a company’s profitability if the customer fails to pay the full amount on time. That’s why billing in arrears requires a good client-business relationship, impeccable usage tracking, and a solid contract governing the relationship.
When and why is billing in arrears used?
Billing in arrears makes sense when you cannot calculate how much you’ll charge the customer upfront. It’s a highly flexible arrangement for industries where deliverables affect payment.
Billing in arrears makes sense in several situations, including:
– Consumption-based services like utility payments
– Recurring billing with potential upcharges, such as phone plans with data overage fees
– Hourly or project-based rates for independent contractors
– Performance-based projects, such as affiliate marketing campaigns
Billing in arrears is helpful because it:
Offers greater transparency: Billing in arrears allows businesses to provide a detailed breakdown of everything the customer paid for. There’s clear evidence of what the client received.
Improves the client experience: Not only does billing in arrears flex with client needs, but it often also offers clients better payment terms. This billing model has a risk of late payment, but most clients appreciate having extra time to pay their invoices.
Supports advanced billing management: Billing in arrears can complicate billing management, but many organizations like the option to manage tiered pricing, add-ons, and performance-based fees in their finalized invoices.
Billing in arrears vs. billing in advance
Billing in arrears is the opposite of billing in advance. With billing in arrears, you charge a customer after they receive a product or service. On the other hand, billing in advance charges customers before they receive the product or service.
Billing in advance is great for businesses, but many customers balk at paying upfront, especially if they haven’t received the product or service. Still, billing in advance allows companies to manage costs, resources, or commitments so they can do the job. This billing model helps with cash flow and provides financial security for the business while ensuring customers are wholly committed to the process.
Billing in arrears is better for services or products with variable pricing based on usage. Customers prefer this option because they receive a clear invoice for everything they paid for and received.
Choosing between billing in arrears and billing in advance depends on the nature of your services, customer expectations, and cash flow needs. Some businesses adopt a hybrid approach to balance flexibility and financial security. For instance, a SaaS company may charge a flat subscription fee in advance while billing separately in arrears for overages or additional services.
Pros and cons of billing in arrears
Both businesses and customers can benefit from billing in arrears, but this billing model has its drawbacks. Understand the pros and cons of billing in arrears to decide whether it’s a fit for your business model.
Pros
Transparency: Customers pay based on actual usage or services rendered, fostering trust and accountability. This clarity strengthens customer relationships and satisfaction.
Flexible payment options: Clients don’t commit funds upfront with billing in arrears, giving them the flexibility to pay after work is delivered — and often several weeks afterward.
Variable billing: Does your business have a usage-based model or variable pricing? Other billing models would require charging customers additional fees to make up the difference, but billing in arrears reflects accurate usage in a single invoice.
Competitive advantage: Customers prefer billing in arrears because of its flexibility. If other companies in your industry don’t offer this billing model, making the switch could give you a leg up on the competition.
Cons
Cash flow issues: Billing in arrears can lead to delayed payments, which can cause significant cash flow issues. Enterprise businesses might be able to shoulder this issue, but it can be a tremendous challenge for small and midsize businesses.
Administrative burdens: Preparing detailed invoices after services are rendered can be time-consuming, especially when dealing with multiple clients or complex billing structures. This approach is even more challenging for enterprises but can be alleviated with the right enterprise billing solution.
Potential client issues: Clients may struggle to budget for end-of-cycle payments, leading to disputes or delayed payments.
Billing in arrears best practices to reduce risk
Billing in arrears can be challenging, but the right approach mitigates many of these issues. Follow these best practices to reduce the risk of billing after delivering work.
Use a reputable billing solution
Adopting a comprehensive billing platform like Zuora can streamline your billing processes. Zuora offers flexible options, including billing in arrears, and supports complex pricing models. With features like automated invoicing, payment collection, and revenue recognition, Zuora helps manage billing operations efficiently, reducing the risk of errors and improving cash flow management.
Ask for upfront deposits
Requesting an upfront deposit minimizes risk by asking clients to pay a percentage of the estimated total, usually 20% to 50%. The down payment gives businesses financial breathing room while ensuring client commitment. Since deposits are much smaller than invoice totals, they still allow clients to pay the total amount later.
Agree upon payment terms and late payment policies
Communication is the key to getting paid in full and on time. Before you start work, ask the client to sign a contract detailing how you will work together. The contract should include clearly defined payment deadlines, details on late fees, and the consequences of non-payment.
Never start work without a signed contract first. Not only does a contract put you and the client on the same page, but it also gives you legal backing if they refuse to pay.
Automate payment reminders
Use accounting software to automate invoicing and send timely payment reminders. Your billing solution should be able to identify overdue invoices and schedule an immediate follow-up. Some clients will ignore these reminders, but others just need a little nudge to remember to pay their invoices.
If your business serves many clients, sending reminders manually takes too much time. Automate the entire process to reduce administrative workload and ensure consistent follow-up on outstanding payments with all clients.
Invest in client relationships
You can’t prevent all late payments, but you can reduce them by investing in solid client relationships. Happy clients tend to pay on time, so work with your team to deliver top-notch service. Ask your project managers to give clients the white-glove experience they expect.
Transparent communication will go a long way in preserving a client’s trust in your business. That trust often translates into positive behavior like referrals, continued business, and — hopefully — on-time payments.
Simplify billing in arrears with the right tools
Billing in arrears is a very common billing strategy. While it can reduce invoice confusion and improve client relationships, it also risks late payments and cash flow issues. Follow the best practices in this guide to protect your business while offering your clients more flexibility and transparency.
Manually managing billing in arrears requires a lot of effort, especially for large accounts or enterprise businesses. If you want to streamline your billing processes and reduce the risks of billing in arrears, leverage Zuora’s advanced billing software. Our platform handles complex billing scenarios, provides detailed insights, and optimizes financial operations.
Check out the Billing Software Buyer’s Guide to learn how the right tools make billing in arrears easy for businesses of all sizes.