The Advantages And Risks Of Billing In Arrears
Have you ever caught yourself wondering, ‘’what does arrears mean on my payslip?’’. In this post, we’ll cover everything you’ll need to know about bills and outstanding dues.
What Does Getting Paid In Arrears Mean?
Billed in arrears are payments that are behind schedule either by accident or on purpose. In other words, this term refers to the money you owe someone.
However, this doesn’t imply that bills in arrears mean something bad. Businesses see them as a way of categorizing payments.
Payments made after receiving a service and those that fall behind are considered overdue by nature. They’re categorized either as reparations that have to be made to complete a service or amount received against a past due bill.
Other than intentionally falling behind, repayments made in this manner might be due to a disagreement over the invoice. Disputes over the items or prices can back up the paying schedule.
The only time these should mark a red flag for you is during one of the following situations.
- The customer refuses to follow up with outstanding balances
- The client has the intention of paying but has fallen immensely behind in debts. Therefore, the payment doesn’t seem to happen anytime soon
It’s always smart to clear your payables on time. Too many outstanding balances can affect your credit and negatively impact your ability to secure loans.
When To Use Arrear Billing
This method comes in handy for businesses that make hourly, cyclical, or periodical payments to their employees. It’s also helpful for companies that involve sales commission and tips.
In all of the above cases, this method is relevant, given it’s hard to determine the final compensation amount until the end of the specified period. It’s better to make payments upon completion of service since a company is never sure of how many hours a worker might put in.
Restitution made after completion of work will be considered outstanding dues.
Who Uses Arrear Billing?
Some industries are known for using this process more often than others. These include:
- Restaurants that tip its employees
- Businesses that offer hourly based wages
- Business operating on sales commissions
- Independent contractual businesses
- People with annuities or loans paid monthly
- Preferred stockholders with dividends
- Utilities and businesses that collect cyclical charges
If you’re unsure whether to make payments later on or upfront, consider your company’s logistics and ask yourself what basic pay arrears mean for your finances.
Billing In Advance Vs. Billing In Arrears
To better understand the meaning of billing in arrears, let’s compare it with payments in advance.
Billing in advance is also known as paying upfront. By comparison, billing in arrears involves requesting repayment after a service has been rendered. Upfront compensation is usually a portion of the actual sum in cases where the total is substantial. Customers are often hesitant to pay up a large sum in advance, so typically a part is secured as a down payment. The remaining amount is then transferred at the end of the service period.
There are three main advantages of payment in arrears.
- Flexible payment schedules: One of the most significant advantages is flexibility and accuracy. You don’t need to invent a new invoice where last-minute changes have been made either to the services provided or the charges involved
- Eliminates any need for refunds: Any need for refunds or guesswork is eliminated since payments are only processed after acquiring all necessary particulars
- Complete compensation: There’s no price negotiation needed overtime. You get the service done and pay for what it was worth
The following can be some unwanted consequences of using this billing method.
- Delayed cash flows: Your payroll has to wait until the end of the service period to get rolling. Businesses that account in arrears deal with this by devising a debt-based accounting system
- Constantly reminding customers to pay: One downside is that customers sometimes get complacent about paying on time. Although delays of such kind vary depending upon your business history and niche, you must take care to send frequent reminders to keep your outstanding balances in check
Is Arrears Billing For You?
The answer depends on your industry and compensation history. If this billing method works fine without serious set-backs, it’s probably the best option for you. If that’s not the case, then you may want to opt for upfront payments.
The Bottom Line
Contrary to what you might think, compensating after the service period could prove healthy for your business. There’s no guesswork involved and rarely any refunds. However, you must consider your company’s logistics before deciding to opt for this repayment mode.