When it comes to billing your customers, getting to know how to bill in arrears versus billing in advance is helpful before setting up your actual billing process. In the following sections, we will discuss what it means to be paid in arrears and other available options. In each of these scenarios, the final bill or paycheck amount can’t be determined until the designated period is completed. Businesses aren’t sure how many hours their employees will work, and it doesn’t make sense to pay a period in advance when the final number of hours could change. Since it’s easier to pay after a period, or after the service provided by an employee is completed, then that payment is considered a payment “in arrears”.
For accounting purposes, arrears refers to settling accounts for goods and services with external vendors. For example, suppose a supermarket receives a new shipment of fresh milk. Since they did not pay for the milk up front, they will settle the payment in arrears.
What does it mean to be paid one week in arrears?
Receiving an arrear payment also refers to collecting a bill or liability that is only due after the service is provided, such as an employee salary or property tax. This type of payment is often intentional, in compliance with a contract. Billing in arrears and billing in advance are two common billing methods. Many service industry employees are paid in arrears by necessity, given much of their salary is earned through tips.
After the service is finished and both parties are satisfied, the customer pays the remaining balance. Because the customer is paying after the service has finished, this is also considered in arrears. If you’ve ever dealt with accounts payable or receivable, you might have seen the term ‘paid in arrears’ before. Although the term might sound technical, its meaning is straightforward. Keep reading to find out its definition and whether the term applies to your business. At the end of the day, whether you choose to pay current or in arrears, it’s essential to pay on time and accurately.
Pros and Cons of Billing in Arrears
Arrears isn’t only convenient for paying service industry workers. It’s also beneficial for sales professionals, whose earnings are often heavily reliant on commission. Accounting teams need ample time to tally salesperson earnings each payment cycle. You receive a paycheck on May 6, 2023, reflecting work from payment period April 7-21 (you’re paid biweekly).
While some businesses bill customers in advance, many wait until the project is complete before sending the bill. For example, imagine you use a roofing company to repair wind damage. This is because it’s difficult to send an accurate bill before they’ve seen and repaired the damage.
When should you send an invoice in arrears?
While it may make sense to utilize this option for tasks such as payroll, it may not be the best choice for paying certain bills or invoices. To find the best choice, you’ll need to take a closer look at your needs, billed in arrears meaning cash flow and payment history before making a final decision. Some of the most common types of payments to be in arrears include payroll, mortgage, rent, car payment, child support, credit card, and taxes.
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To manage payments in arrears, it’s important to track expenses and income. Doing so will help you manage cash flow and look at what payments are owed to you and what payments you owe to creditors. You have the option to pay for subscriptions either prior to or following the service provision. If you choose to pay in advance, an invoice for the total cost will arrive before the service begins. This approach is popular in industries offering consistent services, like IT, legal, or accounting. On the other hand, if you opt to pay later, the bill comes after the service delivery.
In the financial industry, “in arrears” means that a payment is behind. Subscription billing provides a steady income stream for businesses by charging customers a recurring fee for their products or services. Customers pay this fee regularly, like weekly, monthly, or yearly. When the subscription period ends, customers have the option to renew. These systems let you control when your customers receive their invoices.