Getting Paid in Arrears: What You Need to Know
LAST UPDATED: June 11, 2022
There are a lot of terms in the accounting world that can be confusing for business owners, especially if they don't have a background in finance. One such term is "paid in arrears."
What does this mean, and what implications does it have for your business? In this blog post, we will discuss everything you need to know about arrear accounting and how these types of payments are applied when conducting business.
What Does "Pay In Arrears" Actually Mean?
The term "pay in arrears" simply means that you will be paid or pay for a service after it has been provided instead of being paid in advance. This is different from "accrued expenses," which are those that have been incurred but not yet paid. With accrued expenses, the service has been provided, but the bill has not yet come due. With pay in arrears, the service has been provided, and the bill is now due.
Arrears can also refer to a business not being on time with its payments. If a company is said to be in "arrears," this means that they have not made a payment when it was due. This can apply to both customers and vendors/suppliers. The arrears amount will accrue from the original due date until the bill is paid in full.
Understanding The Implications Of Getting Paid In Arrears
Now that we've covered the basics of what it means to get paid in arrears, let's look at some of the implications this type of payment schedule can have on your business, depending on how it's being used in your specific situation.
Being Compensated After Services Are Rendered
This type of arrangement is pretty straightforward when you're the one being paid in arrears. You provide a service to a client, and then they send you a bill for that service after it has been completed. The main thing to keep in mind here is that you need to ensure you have enough cash flow to cover any expenses incurred while waiting to get paid. This is especially important if you have any recurring expenses, like rent or payroll, that need to be paid on a regular basis.
If you're the one paying in arrears, delaying payment until after you've received the goods or services can help you conserve cash flow. For example, if you're a small business owner who orders inventory from a supplier, you should take advantage of any payment terms they offer. This way, you don't have to pay for the inventory until after you've received it and had a chance to sell it to your customers. This gives you extra time to increase your cash flow so you can pay the bill when it's due.
Of course, there are also potential downsides to this approach. For example, if the supplier is not well-capitalized, they may have difficulty extending terms like this to their customers. This could put them at risk of not being able to deliver on their end of the deal, which would obviously be detrimental to your business as well.
Another potential downside is that you may not get the best terms from your suppliers if you're always paying late. They may start charging you late fees or interest, or they may require you to prepay for future orders. These fees can quickly add up and offset any cash flow benefits you were hoping to achieve by paying in arrears.
Missing A Payment
The other scenario is when your company may miss a payment. This could happen for a number of reasons, such as accidentally missing a payment or simply not having enough cash on hand to cover the bill when it's due.
If you find yourself in this situation, it's important to take action as soon as possible. The longer you wait to make a payment, the more interest and late fees will accrue, and the harder it will be to get caught up.
One option is to try to negotiate a new payment plan. This could involve extending the due date, making smaller payments over time, or even getting a temporary reduction in the amount you owe. However, you may just need to make a one-time payment to get back on track.
What Are The Benefits Of Arrears On Payroll?
The idea of using arrears payroll is the idea that you're running the past weeks' payroll in the current week. This has a few benefits.
Ensures Accurate Hours
Having to conduct payroll at the end of every week can be hectic, especially if you're running a business with a lot of employees. Trying to track everyone's hours and make sure they're being paid accurately is a time-consuming task.
You can take the pressure off yourself and your employees by conducting payroll in arrears. This way, you can be sure that everyone is being paid for the hours they actually worked, and you won't have to waste time chasing down employees for accurate time sheets.
Allows More Time For Approvals
Another benefit of conducting payroll in arrears is that it allows more time for approvals. If you're running a business with multiple managers, it can be difficult to get everyone to sign off on payroll in a timely manner. By conducting payroll in arrears, you can give managers more time to approve hours and ensure that everything is accurate.
This can also be helpful if you have employees who are paid hourly. By conducting payroll in arrears, you can ensure that all hours worked are approved before they're paid, which can help avoid any disputes or discrepancies down the line.
Easier For Small Business Owners
For small business owners, conducting payroll can be a daunting task. Arrears payroll can help take some of the pressure off by allowing you to run payroll once the week is over. This way, you incur fewer mistakes and can focus on running your business.
Summing It Up
Understanding what it means to be paid in arrears is essential for both businesses and individuals. This type of payment arrangement can have both positives and negatives, so it's important to weigh the pros and cons before deciding if it's right for you.
For more help when it comes to managing your small business and payroll, connect with Zeffry. We provide payroll solutions to ensure that running your business is as easy as possible. Visit our website or contact us today to learn more!