What is Billing and Invoicing?

Billing

In the SaaS landscape, billing refers to a complete financial process which begins from invoice generation, and ends at managing the accounts receivable.

In normal day-to-day scenarios, we often encounter the word ‘bill’. For instance, we all know about utility bills, such as gas or electricity bills. Those bills are immediate requests for payments generated by the utility providers. They contain a summary of the utility usage, and the total payment a person is supposed to pay. Generating these bills is also called billing. And this definition of billing is mostly used in B2C (business to customer) scenarios.

However, the definition of billing in the B2B or SaaS context is entirely different. This billing encompasses the whole payment processing lifecycle. It means that billing is a process which comprises several sub-processes or stages. These stages are invoice generation, invoice transfer, customer accounts management, payment tracking, payment collection and recovery management.

Billing is essential for maintaining accurate records of financial transactions. A powerful billing software makes sure that your business is keeping proper accounts of its receivables. Another important aspect of billing is the management of customer accounts. By managing customer accounts, it means to keep track of, and a comprehensive record of all the financial activities related to each customer. A good billing software helps in keeping accurate records of customers’ transactions.

Moreover, a billing software also assists in all the financial processes leading to payment collection. It automates most of a business’s workflow, and saves them time and hefty manual errors. It auto-generates all the customer invoices and ensures that they are sent to the customers on time. Then it tracks the payment statuses of all the invoices, and flags the outstanding ones. Businesses need to follow up with their subscribers in order to get them to pay. If they are using a robust subscription and billing platform, then they can benefit from its dunning management features for better payment recovery strategies.

After the transactions are complete, with the refunds sorted and credits applied, all the transaction data is safely stored within the software. Financial reports can be obtained based on that data. Resolving customer disputes over any payment issue is necessary for good customer experience. Additionally, it is a great and necessary practice to keep the customers in loop by providing them with their account statements on a regular basis. This way, they can know about their payment histories, or if and when their invoices are pending.

Types of Billing

These are some famous billing types relevant to SaaS:

Recurring Billing

Recurring billing refers to the subscription billing cycle. Subscribers need to pay at their specified billing periods to continue service usage. Each time the billing day arrives, the whole billing process gets repeated.

Usage-Based Billing

This is another famous type of billing in SaaS. Businesses charge their customers for only what they use. For instance, if a business sells users cloud storage, then it will only charge them for the amount of storage that they have used (considering there has been a price allocated to each storage unit). Thus in usage-based billing, no flat subscription fee exists. The charges vary according to the extent of service usage.

Tiered Billing

It is typical of a subscription business to offer a range of subscription tiers/plans. For instance, a service provider might offer basic, advanced, and premium plans based on the quality or quantity of service, the number of users, or the amount of features etc. Each tier’s price corresponds to the value it delivers. When a user subscribes, they select one tier. Then they are billed according to the price of that tier on a recurring basis. Once a user switches their subscription tier, their charges change too.

Prepaid billing

Prepaid billing is similar to usage-based billing. Here, a user pays upfront for a specific amount of service, or for a specific time period. For example, a user can buy credits in advance, and use them to benefit from certain services or features. Once these credits run out, and users wish to renew them, they are billed again for the new credits they receive.

Invoicing

Invoicing is the process of invoice generation. An invoice is a financial document which can be seen as a payment request. For example, if a vendor is providing some services to a client, then the vendor would create an invoice for the client whenever their payment is due. An invoice is a means of notifying your customers that their payments are due.

In the previous section we described the ‘bill’ in a similar manner. However, an invoice is distinct from a bill. Whereas a bill mainly serves as a payment reminder, an invoice gives customers all the service details which have led to the total payable amount.

Generally speaking, an invoice contains the total due amount, other important transaction details, and payments terms. In this way, the customer receiving the invoice gets a comprehensive statement of their spending. Invoices are more common in the B2B market, than the B2C one. Since businesses prioritize keeping their financial records straight.

This is even truer in the context of the SaaS industry. Just like billing, invoicing is also an important financial process for SaaS businesses. And since SaaS companies operate on cloud, they can create more detailed invoices thanks to the customer data they store on cloud.

Some key information that is present on the invoice is as follows:

• an invoice number (a unique code assigned to each invoice for tracking purposes)
• business details such as name and contact information
• customer details such as their name and account information
• service details which clearly show which services have been utilized and how much has been charged for each (if the total cost has been calculated on the basis of any other quantifiable metrics, such as the time of service usage, they are also mentioned)
• the total amount payable including any taxes or discounts applied (the tax details are also given)
• payment terms which include details like payment due dates, accepted methods or any payment related policies important to convey

The purpose of sending an invoice is to inform the user that their payment date has arrived. Another purpose is to develop a transparent relationship with the customer. The customers can clearly see for themselves how much they are getting charged, and for what. Invoices are also kept as legal documentations of the transactions between the company and the customers.

Types of Invoicing

Recurring Invoicing

This kind of invoicing is typical for subscription-based services. The customers have to pay for their service renewal on a regular basis (weekly, monthly, etc.). So every time their payments are due, companies generate and send invoices. As long as the recurring payments cycle goes on, recurring invoicing goes on as well.

Credit Invoicing

Prepaid credits are like virtual money for a subscriber. A company can either add credits to a user’s account as a loyalty incentive, or in case of a refund, or adjust credits for any other account changes. But additions or deductions in credits also call for an invoice to give the customer a complete picture of their service usage.

Proforma Invoicing

Proforma invoicing is an effective way to build trust and transparency with the customer. Proforma invoices are those invoices which are sent to customers before service activation, or before the final invoice is issued. It gives the customer an outline of the charges they should expect, and any additional costs they should be wary of. Thus a proforma invoice is not meant as a payment request, but rather as a heads up of the service charges that the customer has to agree upon.

For instance, a SaaS company might issue a proforma invoice to an interested customer to give them an outline of the subscription costs and any extra relevant charges. If the customer agrees to these terms, and becomes a subscriber, then the final invoice is issued once the service gets activated.

Final Invoicing

A final invoice is relevant in the context of traditional businesses. Final invoices are issued after the service delivery has been completed. They are a demand for the payment of the services provided. However, in the context of SaaS subscriptions, the concept of a final invoice has become obsolete. Subscription services such as Netflix typically send customers their invoices upfront, that is before the service delivery. Service is provided after payment confirmation. Payment confirmation receipts are provided to the customers as transaction proofs.

SaaS businesses can simplify the whole invoicing process with the help of an advanced subscription management software. The software automates invoice generation and transfer, and also tracks paid and unpaid invoices.

Difference Between Billing and Invoicing

The terms of billing and invoicing are often confused, or used interchangeably. There are some key differences between the two processes in the context of SaaS.

By definition

Billing is a comprehensive process which entails invoice generation, payment processing, collection, tracking, recording, and payment failure handling.

Invoicing, on the other hand, is the process of only generating the invoices and sending it to the customers. Invoices include the service provision details, payments terms, total amount, relevant taxes, payment due dates etc. It is a legal transaction document kept in the company’s financial records.

By scope

Billing refers to the entire payment process, from invoice generation to payment collection and reconciliation.

Invoice is a part of billing. It is one stage of the entire billing cycle. Its main purpose is to request payment from the subscriber, and safe-keep the transaction details.

By action

In billing, invoices are created, payments are tracked and processed, customer accounts are managed, refunds and adjustments are managed, payment disputes are resolved, credits are applied, failed payments are handled, transactions are accurately recorded, and financial reconciliations are made.

In invoicing, invoices are created with the details of transactions, the individual and total costs of products or services, payment terms and payment due dates.

By purpose

Billing is essential to maintain accurate financial records. Billing is performed to collect payments from the users, and to ensure proper management of the customer accounts.

Invoicing is essential as an invoice prompts the user to pay. Invoices are proofs of transactions between the business and the customer. They are also used to communicate the details of the service, and the due payment to the user.