Most Common Types of Billing Methods

Billing is the process of creating invoices for completed or upcoming work. Depending on the business you are in, you may need to implement one or several types of billing methods.

Whether a company is selling products or providing services, it needs to arrange comprehensive and transparent billing. Otherwise, it’s easy to make invoicing errors, face problems with inventory tracking, get in trouble with the IRS, and more.

Clients and customers expect a consistent approach to billing. Without it, you may not be able to position yourself as an industry leader.

If you are thinking about choosing the right billing method for your company, you can benefit from one of the following options.

Fixed Billing

Fixed billing, also called the flat fee billing method is the process of issuing an invoice when the amount of performed work is predetermined. For example, the client is paying you for a software development project.

You agreed on an amount of $12,000. The client can either pay the entire amount immediately or cover a portion of the bill every month. The amount can be the same or vary slightly each month. For example, over 3 months, they pay $4,000 per month. Alternatively, they can pay $5,000 in January, $4,000 in February, and $3,000 in March.

The fixed billing approach works for projects that have a fixed price. In the contract, you can mention how a billing method can change if additional needs arise.

Hourly Billing

If you are providing hourly services, you can implement the hourly billing method. This is the most common approach that can be suitable for a variety of industries. By taking advantage of the hourly billing method, you are generating invoices based on the number of hours worked.

You can use special software that logs your working hours and generates invoices automatically. Alternatively, you can implement manual hourly billing.

To take advantage of the hourly billing, you need to set relevant rates for each hour worked. Depending on your industry or services, you can have different hourly rates depending on the time of the day, week, or year.

Billing on Completion

If you are working on a large project, you can implement billing on completion. The client makes a payment after you provide the service or complete a project. This billing method is highly convenient for both the service provider and the customer, especially if new expenses arise throughout the project.

You can issue one invoice that contains all the project expenses when the work is completed. Then you can allow the client to break the payment down into several parts if necessary.

Usage-Based Billing

Usage-based billing involves billing a customer for the number of services they use. This can work well for SaaS companies and telecom companies that don’t have fixed project prices.

For example, instead of paying a fixed amount, a customer only pays for the services they use this month. This can include internet traffic or water and electricity usage.

With a usage-based billing solution, this approach becomes much less complex and time-consuming while being highly convenient for all parties involved.

Recurring Billing

Recurring billing is the common billing method for SaaS companies and for other businesses that provide regular services. You set a specific amount that each client pays regularly (weekly, biweekly, monthly, annually). The amount remains the same throughout the contract.

This type of billing is easy to implement. With the right software, you can automate the billing process while the customer can set up automatic payments.

Progress Billing

Whether you are working on a large project or providing regular services, you can take advantage of progress billing. Once you finish a part of the project, you can generate an invoice. It’s also possible to bill the client for the projected value of work for the next period of time. After that period is up, you can make adjustments toward the next billing period.

Progress billing can be highly helpful for projects that require significant expenses on the part of the service provider. By billing the customer in advance, you can receive the money you need to continue the project.

How to Choose the Right Billing Method

To choose the right billing method, you need to consider several factors, including:

·        Customer capabilities – some clients have the resources to make large lump sum payments while others need a flexible payment option. Many companies adjust their billing methods to the customer’s needs.

·        Automation options – billing automation can take a significant burden off the accounting department’s shoulders while minimizing errors and adding convenience to the process. Review your tech stack and consider new tools for billing automation purposes.

·        Number of projects – depending on the number of projects you are handling, you may decide to choose the billing method that brings you the money when you need it the most.

·        Project requirements – if you are a contractor that needs to buy materials, you need to choose a billing method (e.g. progressive) that allows you to do so. Meanwhile, a service provider, such as a managed IT company, may take advantage of the recurring method.

If you are working with complex projects and multiple customers, you can explore less common billing methods that suit your business. While juggling several billing methods can be complicated, the right tools can simplify the process and keep customers happy. 

Richard Maxwell

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