Managing cash flow is critical for any organization, whether you are a novice or a seasoned entrepreneur. If you want to take your business to the next level, you must thoroughly understand how to successfully manage accounting tasks for your chosen billing option.
One of the most popular billing options, that you should be aware of in terms of accounting, is advance billing. This is a form of billing whereby the customer is charged before the product or service has been provided.
Providing goods and services without payment is one of the most dangerous threats organizations face. Whilste this is a typical practice for many businesses, it doesn’t have to be the only approach. Instead, you may decide to request payment in advance for your goods and services.
Advance payment accounting
When a payment is taken before a product or service is given provided, this is known as an advance payment. For example, with project management clients are sent invoices based on the agreed upon scope of work.
This usually takes place at the start of the project and is known as advance billing. A deposit, a partial payment, or a total lump sum payment are all examples of advance payments that are used as a form of advance billing.
Advance payments are a risk-reduction strategy that ensures you have the working cash you need right now. If you accept advance payments, you'll need to account for these properly, regardless of whether they’re deposits or the full payment amount.
Advance invoice
An advance invoice is an invoice that is sent to the client or customer before the product or service is provided. When an advance invoice is used in billing, the issuing organization can define precise payment terms and get a better understand and guarantee as to when they’ll receive the revenue for the product or service.
They’ll also benefit by being able to cover the their costs upfront, rather than if they were to wait for money after the product or service has been provided.
This advance billing process can be beneficial to numerous organizations, all of differing size. Upfront payments collected using advance invoices can help with staffing and process costs in large projects, but also material and admin costs associated with the fulfillment of smaller goods and services, like subscription boxes.
Subscription models are a great way of facilitating advance billing using automated advance invoices. Some subscription models even allow your customers to pay in advance for multiple future terms, and can further ensure future revenue using minimum term contracts.
To utilize advanced invoicing correctly, an advance invoice should include the following information:
1.)Your company's name and address.
2.)The client's name and address.
3.)A unique invoice number.
4.)Details about the VAT.
5.)Invoice due date.
6.)Services and goods that are specified.
7.)Payment terms and timeliness are clearly stated.
Benefits of advance billing
There are numerous advantages of advance billing-
1.)Compared to traditional billing, it is much easier to automate the billing process with advance billing.
2.)The time and effort spent pursuing down payments will be saved.
3.)The corporation will have sufficient cash to pay its operating expenses in advance.
4.)Recurring payments for repeat clients become easy to schedule.
5.)Because payment is made in advance, there is less stress regarding collections.
6.)New customers are given immediate credit.
Billing in advance vs billing in arrears
Generally speaking, there are two billing choices options for businesses, billing in arrears and advance billing.
Billing in arrears refers to sending invoices to consumers after the product or service has been provided. In contrast, advance billing refers to sending invoices to customers beforehand. The differences between advance billing and billing in arrears are numerous, so let's take a closer look:.
1.)When you bill in advance, you already have the capital to use for providing your goods and services. However, some buyers are unwilling to pay in advance without being able to view the finished product first.
2.)When you bill in arrears, you can demonstrate the quality of your product or service before requesting money.
This makes it easy to establish trust with your customers, but can be difficult if you don’t already have the funds to facilitate your goods and services.
3. Invoicing using billing arrears can lead to an increased risk of late payments and written-off invoices.
Customers can give a variety of justifications for not paying, but by providing the product or service prior to payment their motivation to successfully pay their invoice can be dramatically reduced, leading to the necessity for frequent follow-ups.
4.)The need for processing refunds is increased when billing in advance. This can happen if a client customer decides they no longer wants to commit to the product or service after the invoice has been issued, but before the product or service has been provided.
Refunds are unusual when you bill in arrears because you won't be paid until the product or service has been delivered.
Reasons to use advance billing.
1.)To be able to pay for the supplies needed for a product or service without being out-of-pocket.
2.)As a precautionary measure for orders of a specific size.
3.)To lower a business's risk of nonpayment.
4.)Allow clients to place pre-orders for goods.
5.)To fulfill the customer's wants and needs in terms of advance billing—there are many reasons behind the customers themselves wanting to be billed in advance. This includes having pre-defined billing dates and the ability to check payment amounts and agreements using an advance invoice
How is advanced billing managed in invoicing?
When a company decides to use advanced bills it’s critical for them to account for the advance invoices correctly, in order to keep their cash flow in check. The advance invoice is usually split into two sections, the accounts receivables section and the accruals section.
The accounts receivable section behaves like functions as aa standard invoice, meaning it should appear on your AR ageing report. However, it's important to remember that it'll be deemed a current liability if earned and received in the same fiscal year. On the other hand, the accruals section is treated as a credit memo and behaves as a debit to your deferred revenue account.
It's important to remember that advance payments are classed according to whether or not the products and services have been provided. Therefore, it will be easier to manage cash flow if you clearly understand what income is earned and what revenue is unearned.
Accounting for advance billing
When accounting for advance billing there are various advance billing accounting treatments you can use to make sure you’re accurately managing your cash flow. One of these treatments is Revenue Recognition.
Revenue Recognition is an accounting principle where the revenue generated from advance invoices is recognized over the period the product or service is provided, not when the initial payment is received.
For example, let’s say a customer paid an advance invoice on the 1st January of $90 for a service that was due to last until the 31st of March. The initial revenue received in month one (January) is $90 with no additional revenue is received for the 2nd and 3rd months (February and March).
Since there is a liability to provide the service to the customer throughout February and March, the $90 cannot be entirely recognized in January. By using Revenue Recognition, the revenue is instead recognized over the entire three months the service is provided and the monthly breakdown can be used in income reporting.
Accurate revenue recognition is an integral component of any business. It’s recommend following this methodology for better reporting as it lets you gain a greater, more precise understanding of your company finances.
Conclusion
Advance billing is an intelligent approach to managing customer payments, especially for regular products and services. It ensures a higher revenue guarantee for the business and can even extend the life of a customer, once they trust the product or service that’s provided after payment.
That being said, it does require some forethought and attention to your accounts to ensure you're assigning the correct revenue amounts to your income reporting.
Billsby's advanced billing features, including their Revenue Recognition and Deferred Revenue reports, allow you to collect advanced recurring income using automatically generated advance invoices.