You have likely come across the term ‘paid in arrears’ if you have ever dealt with accounts payable or receivable before. Don’t be put off by the technical sounding words involved here, as the meaning is rather simple and straightforward.
By reading on further you will find out exactly what it means and how the term may potentially apply to your own business venture.
Definition of paid in arrears
It is said to be paid in arrears once a payment has been made after a transaction has been completed. Sometimes this is done intentionally to abide by the terms of a contract, though it can also be done unintentionally. For example, if a client makes a late payment, it would be unintentional. Keep in mind that ‘in arrears’ applies not only to payments you make, but also those you receive.
Here are some examples to help with your understanding of the term:
- You are paying in arrears if you pay for a service after it has been received
- You would be billing in arrears if you sent out a bill after providing a service
Paid in arrears meaning in payroll
You will often come across arrears within the context of payroll. You will find in this situation that it often refers to paying an employee for work they have previously completed, during a past pay period, rather than the current pay period. Essentially, this is once again referring to a late payment of sorts.
Take this as an example: if you pay an employee during June for work, they completed in May, you would be paying them in arrears. This is because the employees receive their wage slips after the work has been completed.
By paying your employees monthly in arrears, you are able to more easily calculate tips, commissions, and extra overtime hours. Therefore, many business ventures across the UK find it useful to set up their payroll calendars this way.
The other option you have here is to pay in current. This basically means that employees receive payment for the projected number of hours they are set to work each month. Here the business will pay for the assumed number of hours the employee should complete, rather than referring to a timesheet of completed working hours.
Paid in arrears in regard to accounting
Once you take paying in arrears and put it into accounting, the meaning alters slightly. If you pay for goods and services after receiving them, you pay in arrears. So, if you purchase products or services from a vendor under net 30 terms, you will have a total of 30 days to make your payment. Here, the vendor is choosing to be paid in arrears due to the terms of their contract and/or invoice.
Paying in arrears can give any businesses added flexibility and increased levels of cash flow. If you have more time to pay for something, you will be able to generate more cash for future payments.
Nonetheless, occasionally this can allude to late payments that haven’t been agreed upon. At the point when your business is behind on the bills, this implies it’s in arrears until you’ve finished payment. Paying in arrears is definitely not something to strive for in this unique circumstance. You might need to pay late charges and your reputation could ultimately be damaged.
Pros and cons of billing in arrears
Throughout this article we have spoken about paying vendors in arrears, but you may also want to know more about billing your very own clients. Billing in arrears simply means charging your customers after they have received products or services from you. So, if you are a marketer, you may charge your client once your social media campaign has been launched.
This conveys specific advantages, including more prominent billing accuracy. You will become less likely to undercharge or overcharge for the work and have more flexibility when working out the finer details of your payment.
Then again, your income may endure in the event that you need to stand by longer for payment. There’s additionally the possibility that your customer won’t pay, in which case you’ll have to seek out debt collection. Billing in arrears works best with previously set up, trusted clients.
Is ‘paid in arrears’ right for all business types?
It doesn’t matter what angle you look at it from, be it payroll, benefits, or accounts receivable, paying in arrears will award any business venture additional amounts of time to work out payments and make them accurate. However, you should use this method particularly cautiously so that your overdue payments don’t get out of control and negatively affect your customer relations.
Whether you are utilising current or in arrears payments, you should consider using accounting software that can help keep things straightforward for your company.
Is being paid in arrears damaging your cash flow?
By utilising invoice finance, you can free up the cash that is currently tied in unpaid invoices and use it however you wish.
Invoice Finance is the perfect solution for business ventures that have been turned down by banks after applying, or that have a history of bad credit/financial troubles. If you need to improve cash flow, this is likely going to be a great method for you to utilise.