What It Means (Simple Explanation)
A billing waterfall is a scheduled sequence that automates invoice events and payment schedules over a contract’s term—turning complex, multi-element agreements into predictable billing milestones.
Example of a Billing Waterfall
A customer signs a 24-month agreement with a $30,000 annual subscription plus usage fees with quarterly billing. The billing waterfall issues a $7,500 invoice at the start of each quarter and triggers usage-based billings at the end of each month.
Why This Matters (To SaaS & Finance Teams)
Without a billing waterfall, finance teams face revenue leakage and forecasting gaps:
- Without a schedule of future billing dates, invoices might not be generated throughout the term of the contract.
- Revenue leakage occurs because customers are not invoiced for services they are using and contracted for.
- Cash flow forecasts will be incorrect if an accurate billing schedule is not available. Incoming receivables for future invoices will not be included.
A structured waterfall ensures invoicing aligns with contract terms, driving predictable cash flow and accurate GAAP compliance.
How It Works (Break It Down Simply)
- Identify billing triggers from contract metadata – start dates, milestones, payment schedules, and usage thresholds.
- Define future billing events (monthly, quarterly, semi-annually) based on the expected triggers.
- Generate a billing schedule that identifies dates of future invoices throughout the contract term.
- Schedule automated billing runs to generate invoices based on the billing schedule.
- Create journal entries for billing events to ensure accurate accounting in the revenue subledger.
Common Headaches with Billing Waterfalls
- Tracking billing waterfalls in a spreadsheet
- Spreadsheets do not scale as customer counts grow
- Invoices are sent late or not sent at all
- Revenue leakage from missed invoices
- High DSOs from invoices sent late
- Cash flow forecast inaccuracy
Best Practices
- Generate billing waterfalls in your billing system to ensure timely and complete invoicing
- Use contract metadata (service start, renewal dates, usage thresholds) to identify the billing triggers
- Periodically audit billing waterfalls as compared to contracts to ensure accuracy
- Adjust waterfalls based on contract modifications (upgrades, downgrades, early renewals)
- Adjust billing schedules for exception scenarios such as subscription pauses, credits, and refunds
- Create journal entries for invoices after every billing run and store in revenue subledger
When to Use Billing Waterfalls
Multi-year or annual contracts with multiple payments:
- Installment payments – Quarterly or semi-annual billing plans
- Milestone payments – Based on fulfillment of performance obligations
- Anniversary billing – Customer is invoiced for renewal at the end of each contract year
- Usage-based billing – With monthly invoicing based on consumption
KPI Impact / What It Affects
- 20–30% reduction in days-sales-out (DSO) by issuing invoices on time, consistently
- 10–15% improvement in forecast accuracy by using accurate billing schedules
- 0% revenue leakage due to consistent, timely invoicing
Real SaaS Takeaway
Automate your billing waterfall to reduce revenue leakage and eliminate manual proration errors—no more spreadsheet patchwork.
FAQ Section (Quick Answers to Real Questions)
What is a billing waterfall?
A billing waterfall defines the sequence and timing for invoices across all customer contracts. It drives monthly, quarterly, and annual billing runs.
How does proration work in a billing waterfall?
Proration rules apply mid-period amendments automatically, recalculating remaining billing events without manual edits.
Can a billing waterfall handle multi-element bundles?
Yes. Systems split invoices by element (e.g., subscription vs. usage) and schedule each component per its contract terms.
Want to Go Deeper?
Let Ordway show you how to automate billing waterfalls for subscription and usage-based pricing to minimize revenue leakage and optimize cash flows. Request a demo
Other Glossary Terms
Subscription Pause
Credit Memo vs Debit Memo
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