The choice of billing methods in service companies are strategic because the repercussions of that choice are many and varied. However, it is often dictated by clients or even by custom and practice in the market. Here's a little guide to the advantages and disadvantages of the different billing methods to help you take back control.
Billable hours is the method historically favoured by SMEs in the service sector. It can be defined as all the offers for which each day worked by the service provider will be invoiced at a daily rate agreed in advance, whether that involves completion of a given mission or the assignment of staff to cope with an increase in business, for example. In addition, billable hours often involves resource commitment.
• Main advantage: simplicity
Billable hours is particularly simple to manage. Each day of service equals one day that can be invoiced. This makes it really easy to draw up a cashflow forecast because the future revenue comes directly from the schedule.
• Disadvantage: a quantitative approach
Billable hours is based on quantities of time that are invoiced directly to the client. This is what can make it a bit challenging for the service provider because there's no incentive to complete the tasks assigned in less time than initially planned. It can also be financially risky for the client who has little control over the overall financial envelope.
Project billing, an invoicing method that's making progress
Project billing is increasingly popular with service companies who find themselves entrusted with an entire project by a client. This method is based on the commitment of the service provider to complete a mission and to complete it at a price fixed in advance, which cannot be modified. It is generally combined with a time limit and usually comes with a commitment to achieve given results.
• Advantages: the client controls the cost and responsiveness is increased
This invoicing method is popular with clients because they can control the overall cost. The precise timing promotes the intensive, coordinated mobilisation of teams.
• Disadvantages: pressure and complexity of analysis
This invoicing method brings financial risk to the service provider who may find their margins on the project vary greatly due to contingencies. As a result, project billing puts increased pressure on staff. Pressure that can be counter-productive if it's too great. In addition, assessing the progress of revenue is more complicated, particularly if a mixed method is used, combining billable hours and project billing.
Here, the service provider simply bills the client regularly on a subscription basis in exchange for the services.
• Advantages: visibility and value creation
Both the client and the service provider get great financial visibility because the amounts are controlled for the entire duration of the subscription. The subscriptions can also appear in the client's operating costs (OPEX) rather than as investments (CAPEX). From the service provider's point of view, it's the the creation of value for their business that is promoted by this type of contract. Lastly, from a less quantitative point of view, the contractual nature of a subscription is often a reflection of a relationship of trust between the two companies who see their collaboration as being a long-term one.
• Disadvantages: sophisticated tools and staged receipts
The accurate invoicing of all clients on time requires access to sophisticated and effective tools. The transition to a subscription method can also cause cash-flow problems. Receipts that used to be invoiced in one go are now spread over the subscription period.
Sometimes, a business may use all of these methods depending on the type of project and the type of client. With each request, don't forget to consider what will create most value for your teams and create the greatest security for your cash-flow.
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