Guide
4 min read
By MSP Margin Editorial
Every MSP agreement answers a timing question, whether anyone wrote it down or not: do you bill for a month of service before it happens or after it ends?
Billing in advance means the October invoice goes out at or before the start of October. Billing in arrears means you invoice after October closes, based on what was actually delivered. Most MSPs bill flat managed services in advance. Usage, overages and mid-month additions are where practice splits.
What each choice does to cash
Billing in advance puts cash in your hands closer to when you incur the cost. If a client pays on net 15 terms, money for October arrives in mid-October, while your technicians are still working the month.
Billing in arrears pushes everything back. An invoice dated November 1 for October service, paid on net 30, shows up in early December. You carry payroll, tools and licensing for that client for roughly two months before seeing the cash.
The gap matters most with resold licensing. If your distributor bills you for Microsoft 365 seats at the start of the month and you bill the client after the month ends, you are financing your client's licenses out of your own working capital. Multiply that across every client and it can be a meaningful amount of cash tied up for no margin.
Arrears does have a place. For true usage, such as metered cloud consumption or overage hours, you often can't know the amount until the period ends. Many MSPs use a hybrid: the flat agreement in advance, variable items in arrears on the same invoice.
A worked example with a mid-month addition
Take an illustrative client with 50 users at $100 per user per month, so $5,000 a month. On October 16, they add 10 users. October has 31 days, and the new users are covered from the 16th through the 31st, which is 16 days.
Prorated on actual days, the October charge for the new users is 10 × $100 × 16 ÷ 31 = $516.13.
Here is how the two approaches play out:
| Billing in advance | Billing in arrears | |
|---|---|---|
| Invoice dated October 1 | $5,000 for October | Nothing for October yet |
| Invoice dated November 1 | $6,000 for November plus $516.13 October true-up, total $6,516.13 | $5,000 base plus $516.13 additions for October, total $5,516.13 |
| Invoice dated December 1 | $6,000 for December | $6,000 for November |
Under advance billing, by November 1 you have invoiced $11,516.13, covering October and November. Under arrears, you have invoiced $5,516.13, covering only October. The revenue earned over those two months is the same either way. The difference is entirely timing of cash.
The proration method matters too. Some systems divide by the actual days in the month, others use a standard 30-day month. On the same addition, a 30-day convention gives 10 × $100 × 16 ÷ 30 = $533.33, which is $17.20 more. Neither is wrong, but your contract and your PSA should agree. Check how ConnectWise PSA, Autotask, HaloPSA or whatever you use is configured to calculate it, and make sure removals follow a stated rule as well. Some MSPs credit reductions immediately, others apply them at the next billing period. Put that in the agreement so it isn't negotiated client by client.
What it does to the books
On an accrual basis, revenue follows the service, not the invoice. The timing of billing changes which balance sheet accounts carry the difference at month-end.
With advance billing for the current month, an invoice on October 1 for October service is fully earned by October 31, so nothing usually needs to be deferred at month-end. The issue shows up when you invoice early, say on October 25 for November. That November amount is not October revenue. If the client has already paid it, it sits in deferred revenue until November. If not, whether and how to record the invoice before the period starts depends on your contract terms and your accounting policy.
With arrears billing, the reverse happens. At October 31 you have delivered a month of service with no invoice yet. To get October revenue right, you record an accrual for unbilled revenue, then reverse it when the November 1 invoice posts. Skip the accrual and October looks light while November looks heavy, which distorts margins in both months.
The October true-up under advance billing works the same way. The $516.13 billed on November 1 was earned in October. If your close is tight enough to report monthly margins, accrue it in October.
None of this changes total revenue over a year. It changes which month it lands in, and for MSPs that review monthly margins or report to a lender, that is the whole point.
This is general information about common MSP billing practices and how they typically flow through accrual-basis books. Contract wording and your accounting policies can change the right answer, so confirm the treatment with your CPA before you change billing terms or month-end entries.