‘Activity-based billing’: the right move for managing cash flow?

More and more small and midsize businesses are changing the way they charge their customers — and in most cases, it’s music to a CFO’s ears. 

The market-strategy consultation firm iGR recently released a whitepaper (read it here) on activity-based billing, a customizable approach to billing that is based on how customers use products or services rather than using flat fees.

Of 400 small to medium-sized companies surveyed, 28% currently use this type of billing method, while 20% are in the process of switching — 29% are being held back for operational reasons.

Those who already go with activity-based billing cited the following reasons for implementation:

• Support high rates of growth in their customer bases and revenue
• Respond to increasing competition from traditional providers, and
• Actively evolve and future-proof their business models.

CFOs making the decisions

CFO.com points out that much of the decision-making in this matter is actually being done by CFOs. Where CIOs may have been in charge of these decisions last year, CFOs are driving this innovation because this type of system allows for more accurate measurement of risks and rewards.

“They are some of the first ones to recognize that, since they are the ones at the end of the day [who] have to justify the budget,” James Messer, CEO of Transverse, told CFO.com.

Pros and cons

The system isn’t without its downsides, though. Using this billing approach may mean lower risk but that can also entail lower reward. Also, it may be easy to talk about switching to this type of billing system, but it’s another to actually do it. Companies with 100-499 employees who were surveyed in the study were the last to adapt, if they did at all. iGR says this may have something to do with larger companies offering more services than those of smaller businesses.

Still the advantages seem to outweigh the cons. Not only would cash flow be better managed, but customers would also appreciate the added flexibility when choosing your services.

What do you think of activity-based billing? Does your company employ this type of system? Or does it seem too risky a maneuver? Let us know in the comments below.