What is an Automated Billing System & How Does it Work?

Setting the right pricing strategy and managing your business takes a lot of thought and effort, but the work doesn’t stop there. After all that planning, you still have to manually handle tasks like generating invoices, sending them out, and following up on payments. If you’re not careful, these time-consuming activities can quickly eat into your team’s working days—time that should be spent growing your business.

There are better ways to manage billing than doing it all manually. With the right automated billing system, you can streamline these processes from end to end, freeing up valuable time and creating a better payment experience for both you and your customers. Here’s everything you need to start automating billing and invoicing in your business.

What is an automated billing system?

An automated billing system is a software solution that automates a range of manual billing processes, like facilitating payments, calculating taxes, and producing financial reports. At their core, automated billing systems handle recurring invoice generation and take the burden away from your finance and accounting teams at their most basic level.

An automated billing system will regularly bill customers for ongoing services and subscriptions. An effective system can even handle installment payments (depending on how your pricing and packaging are set up). After a purchase has been made, these billing automation systems can seamlessly handle payment processing when invoices are sent out, allowing your customers to pay via credit card, ACH bank transfer, or any other valid payment method.

Challenges with manual billing processes

As your business evolves, billing becomes increasingly complicated. Unfortunately, the old-school method of manual billing lacks the adaptability needed in today's competitive marketplace.

While you might initially think manual billing saves money, it’s time-consuming and labor-intensive. With manual billing, you’ll be juggling payment tracking, maintaining compliance with Generally Accepted Accounting Principles (GAAP)—notably ASC 606—and ensuring every piece of data is accurate. Plus, as your customer numbers grow, manually created invoices can be error-prone and cause issues such as:

• Simple data entry mistakes
• Inefficient processes
• Lack of visibility into billing and customer data
• Challenges in tracking invoices and payments
• Difficulty scaling up
• Unprocessed recurring payments
• Inadvertent customer turnover
• Compliance hiccups
• Inadequate reporting
• Inflexible product list
• Overwhelmed customer support team

But how common are these issues exactly? Some research shows that data entry error rates can reach up to 5 per 1,000 entries, with significant discrepancies caused by both numerical and nonnumerical errors.

Now let’s apply this logic to a Series A SaaS company that’s doing somewhere between $1–$5 million in ARR. If we have an estimated error rate of 5 per 1,000 entries, underbilling or overbilling clients could result in revenue leakage of up to $50,000 annually and additional labor costs of up to $12,000 to correct these mistakes. Those numbers are nothing to scoff at.

Achieving seamless and accurate billing is essential if you want to avoid these potential costs. But aiming for this with manual methods? That's quite the challenge. You could also face a host of other billing problems, including:

Also Read: What is Recurring Payment and What does it mean for Businesses in 2023?

Benefits of using an automated billing system

We can explain everything you need to know about automated billing and why manually managing your billing is a bad idea. However, unless you understand the tangible benefits of automated billing, it’ll be hard to make the switch to a new system.

Here are just a few of the ways you can create a better billing and payment experience with an automated billing system.

Improved accuracy and efficiency

As we discussed, one of the most important benefits of using an automated billing system is reducing errors in your billing. Automating certain processes also ensures that your billing is error-free by eliminating double-billing, missed charges, or other human errors that could occur when you manually calculate and distribute your invoices.

Time-saving

Managing manual billing and payments for even hundreds of customers is massively time-consuming, but automating bulk/recurring invoices based on flexible rules engines can save you hours each month. Automating tedious billing tasks like invoicing and payment collection also frees up employee time that they would’ve previously spent on manual data entry and reconciliation. By reducing time on this repetitive work, you can focus instead on higher-value financial planning and analysis vs. rote invoicing and collections tasks.

Better yet, platforms like Togai come equipped with integrated payment processing. This limits any time that would’ve otherwise been wasted on payment reconciliation.

Better cash flow management

Customer payment portals, automated payment reminders, and real-time invoice tracking make it easier to manage cash flow and forecast your future revenues.

Offering a payment portal where customers can view and pay their invoices can speed up payment processing and improve cash flow. Additionally, real-time invoice tracking can help forecast future revenues more accurately and ensure that you have enough liquidity to cover any upcoming expenses (whether you expect them or not).

Improved customer experience

At the end of the day, the whole point of automating your billing systems is to streamline your operations and satisfy your customers. Accurate and timely invoices coupled with flexible online payment options will almost always increase customer satisfaction.

Additionally, investing in an automated billing system allows you to be more transparent with your customers about how your bills are calculated, how you collect payments, and how your invoicing process works. This transparency results in increased customer satisfaction and profitability.

How does an automated billing system work?

Automated billing software saves companies time, reduces mistakes, and speeds up payment collection by automating billing workflows. These systems provide a comprehensive billing solution and eliminate the need to use multiple solutions to track and meter customer usage.

Here is how you can automate the actual billing process step-by-step. For this example, we’ll be using our own billing software, Togai, but feel free to follow these same steps based on your current tech stack.

1. Collecting customer data

Automated billing starts by capturing customer data, and this data is essential for ensuring that billing is accurate, timely, and tailored to individual preferences. You can also use this data to build detailed customer profiles.

Customer profiles can include payment preferences, contact/delivery details, and any relevant billing or subscription information (such as the customer’s chosen pricing plans). By gathering this data up front, the billing system ensures that:

• Each customer is charged correctly based on their usage or subscription
• Payments are processed via customers’ preferred channels, reducing the risk of errors or delays
• The system automatically charges the customer without manual intervention
• There is smooth communication regarding invoices and payments

How you create these customer profiles will ultimately depend on the billing system you’re using. For example, most software solutions providers offer forms/templates (such as spreadsheets) that your team can use to manually input customer data.

Some companies also integrate their solutions with popular customer relationship management (CRM) or enterprise resource planning (ERP) systems to automatically pull customer information already collected through those platforms. For instance, Togai’s platform integrates with several CRM platforms and configures price quote (CPQ) tools like Hubspot, Salesforce, and DocuSign to automatically pull customer data, pricing information, and contract details.

2. Sending and generating invoices

Depending on your company’s billing periods (monthly, quarterly, or milestone-based for example), billing automation software automatically generates and sends out your invoices for you. Some billing systems even allow complex usage-based, tiered, prorated, and bundled billing. You can configure these systems using flexible templates and rules engines.

3. Multichannel payment processing

Depending on the integrations your billing system offers, you can accept payments from multiple sources, such as credit cards, ACH bank transfers, and wireless payments. This gives you more ways to collect revenue, and it also offers your customers more payment options depending on their personal preferences.

At Togai, we streamline this payment process even further by providing a customer portal for end users to view and manage their price plans, check their pricing schedules, and view real-time usage and cost metrics.

4. Tracking and reconciliation

As customers make their payments, the system assigns each payment to its correlating invoice for accurate tracking. Depending on the billing platform you’re using, you might then be able to use reporting dashboards to gain real-time visibility into your unit's economics and profitability for each customer segment. Once you have this information, you can then improve your profitability by:

• Adjusting your pricing plans
• Offering discounts to specific customer segments
• Doubling down on your most profitable customer segments

At Togai, we even make it easy for you to compare different pricing plans at the customer level to see how a different plan would affect your revenue. For example, you might discover that a usage-based plan generates higher profitability in a segment with unpredictable usage patterns but a subscription-based model works better for customers with consistent needs.

Pricing revenue analytics in Togai (Source)

5. Notifications and follow-ups

At this point, we’ll assume that everything has gone according to plan and that you’ve collected your customer data, sent your invoices, processed payments, and begun collecting any missing or late payments. However, if you’re having trouble managing your dunning process manually, we recommend finding a dedicated collections tool to track down and recover these invoices for a seamless payment experience.

Finding the right balance with payment notifications is key. Most customers typically need 2 to 3 reminders before they take action, but receiving too many notifications can frustrate them. Luckily, automated billing platforms allow you to set customizable rules for when, how, and via what channels you send out these reminders—whether via email, SMS, or even in-app notifications. This ensures that the process is both effective and nonintrusive, improving the chances of payment without overwhelming your customers.

What types of businesses use automated billing systems?

Automated billing management systems aren’t limited to a single industry, vertical, or business model. Instead, these systems can streamline operations across many different types of businesses, including:

• SaaS and subscription platforms
• Telecom and utility providers
• Healthcare providers
• Ecommerce businesses
• Freelancers and service businesses

Of course, each of these businesses will have their own billing priorities. Healthcare providers might use automated billing systems to seamlessly process claims and patient invoices while maintaining HIPAA compliance. Meanwhile, an ecommerce business might be primarily concerned with managing its inventories in relation to the amount it bills each month.

For SaaS companies, billing priorities often revolve around managing subscription renewals, enabling usage-based pricing models, and handling the complexity of prorated billing when customers upgrade or downgrade their plans mid-cycle.

Types of automated billing systems

Your billing tech stack should match your company’s go-to-market (GTM) strategy—not the other way around. So, depending on your GTM motion, there are a few common types of automated billing systems you can choose from.

Recurring billing systems

Recurring billing systems are optimal for subscription billing and recurring revenue models common to SaaS, media services, and other on-demand platforms. A monthly Netflix or Hulu subscription is a perfect example. These billing systems reliably handle high subscription volumes, complex recurring schedules, and dunning for renewed cash flow.

Usage-based billing systems

For business models like cloud infrastructure, digital assets, and utilities, usage-based billing (UBB) systems calculate invoices based on your customers’ product usage. These systems should also integrate with metering systems to ingest real-time usage data and algorithmically derive the correct billing amounts for each customer.

At Togai, this is our bread and butter. We even have metering built into our usage-based billing platform. This means you can implement UBB in your business without worrying about complicated back-end development work.

Want to try these integrations out for yourself? Schedule a demo to get started.

Hybrid billing systems

Instead of sticking to a single pricing model, many businesses now employ a mix of subscription plans, metered usage, tiered pricing, and other complex models to capture revenue across their total addressable market (TAM). These hybrid automated systems combine robust recurring billing for subscriptions with flexible usage calculations.

This best-of-both-worlds approach allows businesses to monetize their existing customer base in several different ways. The only caveat here is that this expanded set of features often comes at a pretty hefty price.

For example, if you wanted to set up multiple billing systems in Stripe, you’d be looking at a standard payment processing fee of 2.9% + 30¢ per transaction. Then, Stripe Billing would add another 0.5% to 0.8% for managing subscription, usage-based, or hybrid pricing models. You could incur even more costs if you need advanced features like automated revenue recognition, sales tax handling, or custom integrations and face potential developer fees for setup and integration with external systems.

How to choose the right automated billing system

You’ll want to clearly identify your key business needs and billing requirements to choose the right automated billing system. This might include analyzing your average transaction volume and the frequency of billing and payment cycles you need to automate. This will help give you a sense of scale.

You’ll also need to clarify your specific billing structure. Is it recurring subscriptions, usage-based dynamic pricing, milestone project billing, or a hybrid model? Many companies choose Togai as their automated billing solution specifically because they want to implement a usage-based billing model.

Key features to look for

When evaluating your choice of automated billing systems, keep an eye out for these features.

• Payment gateway integrations: Your system should easily integrate with leading payment gateways like Stripe and Paystack to accept credit cards, ACH bank transfers, or other emerging payment methods.
• Customization options: It is important to be able to configure workflows, customize invoice branding, and design tailored payment terms and billing cycles, especially with usage-based billing. Modular templates, rule-based automation, and integration adaptors are key for this.
• Security features: Robust security protections like PCI-DSS and SOC 2 compliance, data encryption, role-based access, and audit logs are nonnegotiable when handling customer payment data.
• Scalability: As your customer accounts and transaction volumes grow, your system should horizontally scale without degrading performance or requiring migrations to expensive enterprise tiers.
• Reporting and analytics: As an added bonus, you should look for a billing system with a dedicated revenue analytics dashboard. This will help you understand the business impact of any pricing changes based on actual usage data.

What to avoid

Any shortcomings in your billing systems can undermine their value and risk revenue leakage in your business. Here’s what you should look to avoid:

• Lack of flexibility: Your billing needs will evolve over time, and solutions that restrict you to narrow predefined rules for billing cycles or payment terms won't accommodate that growth. Instead, you’ll want to look for systems with customizable automation flows.
• Hidden fees: Watch out for any undisclosed transaction fees, abrupt hikes for support, or spikes for add-on capabilities. These act as Trojan horses that only reveal their true costs later on.
• Poor customer support: Inadequate support creates headaches when errors arise or features fall short. Response times, channel variety, and integration assistance should matter when evaluating your billing system options.
• Limited integrations: Freestanding tools that don’t interface with the rest of your surrounding finance stack, like ERPs and accounting systems, will only lead to more manual interventions on your end. But by leveraging the out-of-the-box integrations in Togai, you can keep data flowing seamlessly across the tolls you’re already using.

Automate your billing and invoicing processes with Togai

If you want to streamline sending and receiving payments, you need the right tools. And if you want to automate usage-based billing, then Togai should be your billing platform of choice. Our platform was designed specifically to help you quickly implement and execute a usage-based billing model with little to no work on your end.

Ready to automate your billing processes? Schedule a demo with our team to get started.

FAQ

What is auto billing?

Auto billing is the automated process of charging customers' payment methods on a recurring schedule for ongoing purchases and subscription services. It handles everything from automatically signing up customers for subscriptions to processing recurring credit card payments per a defined billing cycle without requiring manual invoicing or reminders. Auto billing provides continuous cash flow for companies with membership programs, SaaS subscriptions, media streaming services, or any recurring payment model by securely keeping customer payment details on file and charging them hands-free on a preset schedule.

What is the difference between ACH and autopay?

ACH (Automated Clearing House) and autopay are two different methods that make it possible to automatically charge customer payments on a recurring basis.

ACH is a bank-to-bank electronic payment network that merchants use to pull funds directly from a customer's checking or savings account. In contrast, autopay refers to the general capability to bill and charge a customer's card on file automatically each billing cycle without additional authorization. While both ACH and stored card autopay allow recurring payments, ACH pulls funds directly from a bank account, while autopay charges a credit/debit card the customer has on file for frictionless transactions.