What does paid in arrears mean? A guide for small businesses

In business finance terms, being in arrears refers to pending payments or debts not settled within the defined time frame. It may either mean that a small business is owed money by customers or clients or that the business itself owes money to its employees or clients beyond the specified payment term.

Whether you are an existing small business or considering starting out, you must clearly understand various payment methods and what it means to be paid in arrears. 

Let’s dive into understanding the concept better. ⬇️

Understanding what it means to pay in arrears

When a business makes a payment after receiving the goods or services, this method is called paying in arrears. It is a retrospective payment settlement method in which invoices are paid according to a predefined billing cycle.

It allows businesses to receive goods or services without making upfront payments and, for example, pay employees after a specified payroll term, pay rent for accommodation after residing in a property, and settle business invoices after receiving the goods or services.

Paying in arrears may also mean a business needs to catch up on payments. In such an instance, the arrears, or the outstanding amounts, are considered accrued from the due date of the first missed payment. This missed payment is added to the subsequent payments until the account is “caught up.” 

Arrears in payroll

In payroll terms, arrears refer to wages payable to employees for the work they have already completed during a specified duration, say a month, a fortnight, or a week.

Paying in arrears is especially useful when workers are paid according to the number of hours they work. 

It affords employers enough time to determine the actual number of hours the employees have worked and accurately compute the wages while taking into account mandatory or voluntary deductions. 

“I don’t have to worry about my time,” she says. “I know that if I have any questions or any issues, it’s gonna be addressed immediately.  I don’t have to stress. It’s a pleasure to do payroll now with Fingercheck!.”

Julie Nieves, HR Director

Varda Chocolatier

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Benefits of arrears payroll

In addition to helping small businesses optimize financial operations, paying in arrears offers several benefits, as described below:

• Flexible payment schedules: This option allows businesses to align payment schedules with their cash flow and better manage financial obligations.
• Improved cash flow management: Optimizes cash flow and maintains liquidity by mitigating short-term financial constraints and delaying wage payments until funds are readily available.
• Accurate compensation: Promotes fairness and transparency in payroll terms by ensuring employees are accurately compensated for the work completed.
• Reduced administrative burden: This method simplifies payroll management by streamlining payroll processes and consolidating payments for multiple pay periods into a single payment cycle. 

What are missed payments?

In managing business finance, there can be instances when a payment or two is missed even after due care. This could be due to human error, oversight, or technical glitches. 

Whatever the reason, it is recommended to have a plan of action when an account is in arrears and to bring it back up to speed. 

Identify arrears early

By identifying arrears early, small businesses can address discrepancies and mitigate potential financial risks to maintain a healthy cash flow. To look out for potential arrears, small businesses must monitor red flags, namely consistent delays in payments, delayed or no response from debtors, and discrepancies between expected and received payments.

Adopting strategies, as mentioned below, can be effective in managing arrears:

• Establish clear payment terms and policies upfront.
• Implement proactive invoicing and follow-up procedures to minimize late payments, offering incentives for early settlement.
• Maintain open communication with debtors to negotiate repayment plans when necessary.
• Leverage technology such as accounting software or debt management platforms to streamline arrears tracking and facilitate automated reminders.
• Implement proactive risk management measures such as conducting thorough credit assessments of clients, setting appropriate credit limits, and regularly monitoring customer payment behavior.
• Enlist the help of debt collection agencies or legal professionals to recover outstanding debts in cases of persistent arrears.

Six tips on paying in arrears

Whether it is making or receiving payments, being caught up in arrears pay can be a burden on any small business. Here are some tips to help streamline the process:

1. Monitor client payments to ensure payments are received on time and mitigate risks.
2. Take proactive action, such as temporarily suspending business, for clients who consistently delay payments until the account is current.
3. Prioritize critical arrears and focus on settling debts, negotiating payment arrangements, or requesting extensions, if necessary, to prevent legal action or damage to credit rating.
4. Create a realistic payment plan to break down the total amount owed into manageable installments and ensure each payment is made on time.
5. Seek financial assistance, such as loans or debt consolidation programs, to help alleviate financial difficulties.
6. Monitor progress in paying off arrears by maintaining accurate records of payments made and remaining balances.

We know that all payroll can be complex! But we hope this guide to arrears helps clear a few things up – remember, if you ever need a payroll provider, we’re just a call or email away!

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Fingercheck and any related entities do not offer tax, accounting, or legal advice. This content is designed for informational purposes only and should not be considered a source of tax, legal, or accounting advice. It is recommended that you consult your tax, legal, and accounting advisors before undertaking any related activities or transactions.