Types of Billing for Accounts Receivable

by Jennifer Reynolds; Updated September 26, 2017
Find a suitable billing system to keep your business running.

Whatever type of business you run, your system of billing your customers is one of the most important aspects of making a profit. Without an effective system for collecting on accounts receivable, you will have a difficult time receiving payment. Without payment, your business cannot run. There are several potential systems you can employ to bill your customers; the one that is right for you will depend largely on the type of business you run.

Prepaid Billing

A popular billing method for service-based business, such as telecommunications companies or Internet service providers, is prepaid billing. In this type of billing, customers pay in advance for a designated amount of service: a set amount of time or units. Payment is due and must be received before your customers have access to their purchased service. It is an effective billing system to ensure your accounts receivable are consistently paid up before services are rendered.

Postpaid Billing

Postpaid billing is a system in which the customer agrees to pay at a later date for products or services received. At the end of a set billing period, you will send an invoice to your customers detailing their account number, service or products used, the amount owed and payment due date. Billing and accounting software is available to help maintain this information. It can be difficult to collect on these types of bills if you are dealing with customers with bad credit, or who simply refuse payment. If you engage this kind of billing, consider offering discounts for prompt payment, but be prepared to assign staff to directly contact customers for outstanding bills. In extreme cases, it may become necessary to turn the account over to a collections agency.

Credit and Debit Memos

Credit and debit memos are not suitable as a sole billing system, but are important in case of changes to an account or payments, or errors made. You will issue credit memos to customers who paid for services or products they did not use or receive, or if an error in your billing caused the customer to overpay. Debit memos will be used in the opposite manner; when a customer uses more than his prepaid allowance, or if he is otherwise undercharged for his services. Debit memos essentially request more money from the customer, while credit memos, or credits, translate into money returned or service credits rolled over to the next billing cycle.

Order-Based Billing

Order-based billing can be likened to prepaid billing for products. If your business is a supplier or wholesaler, you may choose to require your customers to pay in full or in part when they place their order. This carries the previous benefits of prepaid billing. You can also require only partial payment in advance and full payment at a later date, at which point you will need to send your customers an invoice requesting the remainder of the payment. To use this method, you must keep accurate records of what customers have already paid.

Delivery-Based Billing

In this system of billing, you would send an invoice and purchase order detailing each item and quantity to your customer along with their delivery. You may choose to require full payment upon delivery, or specify a payment due date on the invoice. Be sure to include order desk contact information in case of any discrepancy between the purchase order and invoice.

About the Author

Jennifer Reynolds is a professional writer covering crafting, electronics and entertainment topics. She graduated in 2010 with a Bachelor of Arts in professional writing from York University.

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