We've said it before and we'll say it again: there's probably nothing less exciting as a SaaS founder than billing cycles and payment terms, but that's often the most important stuff. Trust us, whether you're looking to hire your first CFO or just updating your fundraising or investor materials, understanding these terms can and how the impact your bottom line is a must-have.
Below, we'll cover everything you need to know about how these two seemingly simple jargon words influence with your business so you can ideally make more informed decisions for your SaaS startup.
The SaaS Billing Process
If you want to understand how billing cycles in SaaS work, you first have to know what SaaS Billing is . We've already written about the SaaS Billing Process in detail
here:
"Billing processes encompass the entire flow of creating, sending, and managing invoices for your SaaS product. This includes setting up pricing plans, billing cycles, generating invoices, automating invoices, and tracking outstanding unpaid invoices. You might think that Billing’s job is done once the bill is generated and that it not explicitly include the payment process, but in practice, it does.
In SaaS, billing processes can be far more complex than you'd expect, and much of this is simply due to the nature of emerging subscription-based billing models. Customers may be billed on a monthly or annual subscription term, with different pricing tiers, usage limits, add-ons, and discounts to consider. Additionally, billing may need to account for mid-term changes in subscription plans, cancellations, or refunds. Some customers might even require specific
line items on invoices.
When all is said and done, there may be dozens of configurations going into a single invoice for a single billing period."
Understanding Billing Cycles
A billing cycle, often spanning a calendar month, is the interval between billing statements. It's the period of time that your customer has access to your product and, in the case of usage-based models, consuming some amount of your features, such as API calls or gigabytes of storage.
For SaaS businesses, billing cycles can vary, with monthly billing cycles being the most common. However, some SaaS companies may opt for quarterly billing cycles or annual billing cycles (or even one-time, one-off cycles). If your biggest customer asks for it, you're not going turn them down just because they want to pay 30% of their contract upfront and the rest with a quarterly billing cycle.
Monthly Calendar Billing Cycles
Expanding into new markets often means dealing with various payment methods and tax regulations in different coMonthly billing cycles that align with the start and end of the calendar month are fairly standard in the SaaS industry, as they give customers a predictable and consistent payment schedule. Customers can anticipate their account balance and prepare for the payment due date, plus other bills are typically due on the same schedule, so this can make things more convenient for the customer and more likely for them to pay on time.
Monthly subscription services will also include any usage or one-off charges that accrued during that billing cycle - so if you're offering a usage-based feature, this shows up on the following invoice.
Quarterly and Annual Billing CyclesSome SaaS companies offer quarterly billing cycles or
annual billing cycles as an alternative to the more frequent monthly billing. These longer billing periods can be beneficial for both the vendor and the customer, as they reduce the frequency of billing statements and typically come with a discount, while you as the vendor get predictable revenue.
More on
Annual Billing Discounts Other Terms You Should Know
Payment Due Dates
This is the date when the customer should have paid the invoice. These dates should be communicated clearly and align with the billing cycle to avoid confusion. If you are a SaaS company, your customers will expect a consistent payment date each month. Some of your enterprise customers might ask for specific payment due dates to align their budgets with the total amount that they have to pay for your software.
Payment CycleThe payment cycle, not to be confused with billing cycle, is how frequently payments are processed. This can align with your billing cycle but may also include other customer payment activities, such as one-time purchases or additional charges outside the regular billing cycle.
If you need help sorting out your billing solution,
Wingback can help! Billing Period
The billing period is the time frame that the customer actually had access to or used your product. For example, you may send out the January bill on February 1, but the billing period is for January 1-31. This period may start as soon as a customer subscribes, or on a set date that aligns with the company's billing cycle. Knowing these delta's in the process are crucial for accurate invoicing, cash flow and financial forecasting.
Invoice
An invoice is, technically speaking, is just a formal request for payment or statement of how much is owed after a product or service has been delivered. Invoices detail the charges for the upcoming billing period. Invoices serve as both a billing tool and a legal document that can be used for accounting purposes and tax records. Key elements of an invoice include:
Invoice Number
A unique identifier for the invoice, used for record-keeping and tracking purposes.
Billing Period
The specific time period for which the charges on the invoice apply, often future-oriented for subscription services.
Detailed Charges
Itemized list of features, products or services provided, along with quantities and prices.
Total Amount Due
The sum total of all charges on the invoice.
Additional Payment Terms
Instructions for payment, including accepted payment methods, payment due date, and any late payment policies.
Late Payment Fees
Late payments can disrupt cash flow and lead to additional administrative work. To mitigate this, some SaaS companies impose late fees as a deterrent against delayed payments. We highly recommend against that if you are an early-stage SaaS startup, as it only adds additional friction with customers and administrative efforts on your end. If you really need to introduce such fees, it's important to state them clearly in the payment terms and on the invoice to maintain transparency with customers.
Conclusion
Even from the earliest days, you might not want to care about things like billing cycles and payment terms as a SaaS founder, but you really should. Understanding billing and payment related terms, clearly communicating them to customers, and even clearly stating them on your invoices and in other customer facing communication is a great thing to do as you evolve from an early-stage startup into a more mature organization. It also helps show your investors and partners that you know what you're doing. And, as you grow and scale and start working with a CFO or other financial institutions, having these elements sorted out is a must-have.
If you're struggling to get your billing set up properly, Wingback can help - let's chat.
