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What is Billing Efficiency?
Billing efficiency refers to the effectiveness and accuracy with which a business or professional entity manages its billing and invoicing processes. It’s a measure of how well these processes are executed, with the goal of minimizing errors and maximizing revenue.
Depending on the type of business, billing efficiency involves different factors.
- For service-based businesses, it’s about efficiently managing time so they can bill the maximum number of hours to the client. This involves reducing administrative tasks or non-billable activities.
- For product-based businesses, it’s about streamlining inventory management, order fulfillment, and dunning to minimize outstanding payments.
- For SaaS companies, it involves optimizing the subscription management and billing process to ensure accurate and timely invoicing.
Besides the nuances that come with certain types of business’s billing workflows, billing process efficiency entails standard procedures across the board. For instance, all companies use time tracking tools, automated invoicing systems, and digital payment methods to streamline their processes.
- Billing operational efficiency
- Billing process efficiency
Impact of Billing Efficiency on Revenue
Reduces Revenue Leakage
Revenue leakage — lost revenue from billing errors or missed invoicing opportunities that goes unnoticed — is a significant problem for ~42% of businesses. It’s usually hard to catch because it doesn’t show up as a loss to the company. They just make less than they should have on paper.
Billing efficiency is crucial in reducing revenue leakage by ensuring that all billable services are accurately tracked, invoiced, and collected. When billing processes are efficient, there’s a minimized risk of underbilling due to lost or forgotten billable hours, unrecorded expenses, or administrative errors.
For example, a lawyer who misses tracking five hours of work per week at $200 per hour costs the business approximately $52,000 in lost revenue annually. That amount of revenue would be easy to spot at a smaller firm. But, for high-volume businesses with hundreds of clients, it’s a lot harder to catch.
This is especially crucial for companies using usage-based or metered billing. If your billing system can’t accurately monitor customer behavior or usage, it might not bill them enough. Over time, this means you’re operating at a much lower margin (and you don’t even know it).
Improves Cash Flow
Efficient billing systems speed up the payment cycle in several ways.
- They provide clear and accurate invoices customers are less likely to dispute.
- Customers receive payment reminders if they miss the initial invoice.
- They automate the invoicing process so customers get their bills on time.
- Flexible payment options make it easy for customers to settle their outstanding balance.
- Customers can access their bills from anywhere and make invoice payments from their mobile devices.
All these factors contribute to fewer late payments and better financial performance.
Increases Customer Satisfaction
If it’s anyone who doesn’t want to deal with cumbersome billing, it’s your customers. With efficient billing, your customer benefits in more ways than one.
- Clarity and transparency. Clear, detailed invoices build trust and reduce confusion on the customer’s end, which makes them happier to do business with you long-term.
- Timeliness. Prompt invoicing reflects a well-organized business operation. Customers appreciate receiving timely bills, as it helps them manage their own finances more effectively.
- Accuracy. Overcharging or undercharging your customers requires them to go back and forth with your receivables department to rectify the mistake. This leads to delay in payment, and it’s something they’d rather not do.
- Convenience. User-friendly payment options like online payments enhance the overall customer experience.
- Responsive customer service. The ability to quickly handle customers’ billing inquiries demonstrates respect for their time, further improving their opinion of your brand.
Especially if you’re dealing with a complex pricing structure (e.g., a SaaS product with flat-rate and usage-based pricing), making your bill as straightforward as possible is the difference between customers trusting your brand and not.
Reduced Customer Churn
When customers are happier, they churn less. Over half of your customers say they’d switch to a competitor after one bad experience. And billing issues are among the most frustrating experiences for them to deal with.
Customers who choose to leave only account for a fraction of your total churn rate, though. According to research from Forrester, involuntary churn accounts for 34% of a company’s total churn rate, on average.
Involuntary churn happens when customers don’t fully understand their invoice or have difficulty paying it on time.
- They missed a payment because the invoice was sent to their spam folder.
- A customer’s credit card expired, and they forgot to update their payment details.
- The system didn’t bill them and they never noticed.
- They don’t have the funds in their linked account to cover the invoice.
Efficient billing helps reduce involuntary churn by making it easier for customers to pay their bills on time before they experience any service disruptions. It also enables them to update their payment info within your platform, which minimizes the chances of losing a customer due to outdated information.
Compliance and Risk Mitigation
Depending on your industry, you might have to comply with PCI DSS, GDPR, HIPAA, or other regulations. Violating these standards carries heavy fines and negative PR.
Since you’re dealing with sensitive data (customer payment information), it’s important to have a secure process. This means using encryption, tokenization, or other data security measures to safeguard your customers’ payment details.
Perhaps the most important benefit of efficient billing is scalability. No matter how many new customers you take on, efficient billing allows you to handle higher transaction volumes without adding significant overhead.
Automation, cloud-based technology, and reliable tracking methods all contribute to your scalability efforts by helping you reduce errors, speed up the payment cycle, and maintain a high level of billing accuracy, even as your business grows.
Billing Metrics Related to Efficiency
Billing Cycle Time
The billing cycle represents the time between one invoice and the next. If your business earns recurring revenue from subscriptions or retainers, this is normally 30-31 days. In other cases, it might be as short as 3 weeks or as long as 6 weeks.
If your business deals in ad hoc sales (e.g., B2B manufacturing, wholesaling, or project-based services), you can’t monitor your billing cycle per se. But you can optimize for efficiency by reducing the time it takes from rendering your product/service to the time you have the money in your account.
You’ll want to look at:
- The date you rendered the service or shipped the product
- The date you sent the invoice to the customer.
- The date the customer received it.
- The date when they paid you (and you received it).
Think of the average number of days between the date you deliver the final product and the day you have the funds in your account as your billing cycle. The faster you can register completion, submit an invoice, and get paid, the more efficient your billing process is overall.
Payment Processing Time
Payment processing time is simply the duration between getting paid and having the funds available in your bank account. For B2B businesses, this is usually 3-7 days. For credit cards, it’s 1-3 days (though it can be as short as a few hours.)
To measure your payment processing time, take the following three steps:
- Record the method used for each payment. Different payment methods (such as bank transfers, credit cards, online payments, etc.) have varying processing times.
- Configure your billing software to report on processing time. This way, you can see how long it takes for each payment option to process in your system.
- Segment data by client or project. Breaking it down helps you identify specific cases where there are delays and whether they are consistent across all clients or unique to certain ones.
If you’re dealing with manual processing or invoicing that needs human intervention at different stages before being posted to your system and credited to your account, it’ll take longer. It will also be more difficult to track, which is what makes having a cloud-based tool so crucial.
Days Sales Outstanding
Days Sales Outstanding (DSO) is a key financial metric companies use to evaluate the average time it takes to collect payment after a sale. It measures the effectiveness of your credit and collections policies.
To calculate DSO, use this formula:
DSO = (Average accounts receivable / Total net credit sales) x Number of days in the fiscal period
- the “average accounts receivable” is your total accounts receivable divided by the number of periods in the fiscal period (e.g., monthly, quarterly).
- your “total net credit sales” is your total credit sales less returns and allowances.
For example, if your total accounts receivable is $100,000, your total credit sales for the month are $150,000, and you are calculating DSO for a month (30 days), the DSO would be:
- DSO = (100,000/150,000) × 30 = 20 days
- DSO = (150,000100,000) × 30 = 20 days
This means collecting payment after a sale takes an average of 20 days.
A lower DSO value is generally ideal, as it indicates your company is able to collect payment quickly. However, the interpretation of DSO can vary by industry and business model. For instance, you might expect a higher DSO if you rely on long-term projects with staggered payments.
Billing Accuracy Rate
Billing accuracy rate measures the percentage of invoices that are correct and error-free. It’s calculated by dividing the number of accurate invoices by the total number of invoices sent during a specific period.
To calculate billing accuracy rate, use this formula:
Accuracy Rate = (Number of Accurate Invoices / Total Number of Invoices) x 100
A high billing accuracy rate is important because it ensures that customers receive accurate bills and reduces the likelihood of disputes or late payments.
Invoice aging is essentially Days Sales Outstanding. But you should measure DSO on a more granular level with an accounts receivable aging report.
AR aging reports show the number of days each invoice has been sitting there. This tells you which customers are paying on time and who needs a friendly reminder.
You can use this information to adjust your credit policies and payment terms for certain customers or offer incentives for timely payments. It also helps you identify slow-paying clients and potential cash flow issues early on.
Customer Satisfaction KPIs
Since dispute management and other support functions are such a huge part of customer billing, you’ll have to monitor a few different KPIs related to your ability to resolve issues.
- First call resolution (FCR) is the number of support calls your team resolved on the first interaction.
- Average response time measures how long it takes to respond to a typical customer inquiry.
- Resolution rate tells you the percentage of customer complaints you successfully resolved within a specific time frame.
Tracking and improving upon these KPIs will improve your customer satisfaction over time.
Ways to Improve Efficiency in SaaS Billing
Of course, reducing errors in your process cuts down the number of support queries and back-office adjustments. This, in turn, makes your billing function run a lot smoother.
There are several ways to avoid errors when you send invoices to customers.
- Use a system that integrates with your CRM to pull order, customer, and product data directly from the source.
- Offer customer self-service portals where they can manage their subscription and billing information. This reduces manual errors and streamlines the process for both parties.
- Use automated alerts and checks to notify you of billing discrepancies before invoices are sent out.
Optimize Non-Payment Recovery
Multiple failed payment attempts could signal to your payment gateway that you’re a high-risk merchant account. This, in turn, could raise fees or lead to your account being shut down.
Here are two ways you can improve the non-payment recovery process:
- Use a recurring payment system that automatically retries failed transactions on a schedule.
- Leverage customer data to identify and follow up with customers who have a history of late payments or missed payments. You could offer them alternative payment methods or set up personalized payment plans to make it easier for them to pay on time.
Accept Multiple Forms of Payment
Especially if you’re transacting in different countries, you’ll need to offer multiple payment methods that are suited to your customers. This could include credit cards, digital wallets, online platforms PayPal or Venmo, and bank transfers.
For international transactions, you should also look for a payment gateway that supports multi-currency processing, so your customers can pay in their preferred currency without additional fees.
Automate Billing and Collections
In some industries, automated billing is the only possible option. For SaaS vendors, it would be impossible to invoice customers one by one every time the next month of their subscription began.
But any business can use automated billing and collections processes to their advantage. Professional services like marketing agencies and accounting firms might have to send their clients an initial invoice, but their billing system can still send auto-reminders to customers if they’re 3 days behind the due date.
Use Billing Software
Depending on the type of business you run, you might need billing software that handles:
- Subscription management
- Time-based billing
- Usage-based billing
- On-demand billing
- Consolidated billing
- Hybrid billing
The idea is to find a tool that suits your pricing model and product complexity.
Integrate Billing with Other Systems
The only way to truly optimize your billing operations is to use a platform that integrates with the rest of your sales and finance tools. That includes:
- Customer relationship management (CRM)
- Configure, price, quote (CPQ)
- Enterprise resource planning (ERP)
- RevOps software
- Your website and customer portals
How a Billing Platform Improves Billing Efficiency
Integrations with other tools and the ability to handle multiple billing scenarios are just some of the ways a comprehensive billing platform can improve your billing operations.
- Billing software automates the billing process, including revenue recognition and invoice reconciliation.
- It seamlessly integrates with other systems to ensure consistency across all your platforms and sales channels.
- It handles multiple billing scenarios, which is important for businesses selling subscription products and one-time add-ons and services.
- Customers can manage their account information independently, reducing support queries and enhancing the customer experience.
- Automated alerts and checks detect billing discrepancies before invoices are sent out, preventing customer disputes and ensuring accurate billing.
People Also Ask
What makes a good billing system?
A good billing system is accurate, efficient, user-friendly, and scalable. It supports numerous payment methods, provides clear branded invoices, ensures regulatory compliance, and offers robust reporting and analytics capabilities to track, analyze, and reconcile financial transactions.
What are the three types of billing methods?
There are three main billing models. Time-based billing charges for services based on time spent. Usage-based billing depends on the unit amount of a service or product a customer used during that period. Feature-based billing varies with the features or tiers of service the customer selects.