Definition
Billing in arrears means invoicing a client after goods or services have been delivered for a period, rather than before it starts. Hourly work, usage-based services, and utilities are usually billed in arrears because the final amount is not known until the period ends. The seller effectively extends credit for the period plus the payment terms.
Also called: Billed in arrears, Payment in arrears, Post-billing
Billing in arrears in practice
Arrears billing is fair to clients, who pay only for what they used, but slow for sellers. Work done on the first day of a monthly period may not be paid for until well over a month later once payment terms are added.
To reduce the gap, bill promptly at the end of each period, keep payment terms short, or combine arrears billing with a deposit or an upfront retainer for part of the expected amount.
Example
An IT support company bills monthly in arrears. On July 1 it invoices all support hours used in June, on Net 15 terms, so June's work is paid by mid-July.
Frequently Asked Questions
Does "in arrears" mean the client is late?
Not in billing. "Billed in arrears" simply means billed after the service period. In other contexts, such as rent, "in arrears" can also mean overdue, so the phrase can be confusing.
When should I bill in arrears instead of in advance?
When the amount depends on usage or hours, such as hourly consulting or metered services. For fixed subscriptions and retainers, billing in advance is usually better for cash flow.
Related terms
- Billing in advance Billing in advance means invoicing a client before the service period begins, so payment arrives at or before the time the work is delivered.
- Billing cycle A billing cycle is the regular interval at which a business issues invoices for ongoing services, such as weekly, monthly, or quarterly.
- Accrued revenue Accrued revenue is income a business has earned by delivering goods or services but has not yet invoiced.
- Billable hours Billable hours are the hours of work that can be charged to a client under the terms of an engagement, as opposed to non-billable time spent on administration, marketing, or internal tasks.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.