The invoice for advance payment (upfront payment or prepayment) is often used by businesses that do not plan to return money or add more goods or services during the order's fulfillment. Usually suitable for new customers, as well as for customers who place recurring orders.
Advantages of advance payment
- The business is left with enough cash in hand to to cover operating expenses in advance thanks to upfront payments;
- Less reliance on short-term loans or bridging loans to offset expenses;
Bridge credit is an interim financing option used by companies to pay existng obligation or solidify their short-term position until long-term or permanent financing can be arrange.
- Less time and effort spent on receiving payments;
- Automating billing cycles is easy and convenient;
- Usually, it is easier to set up recurring payments for regular customers.
Risks of Upfront payment
There are a few reasons why businesses prefer not to issue prepaid invoices, for instance:
- Customers may have concerns about the results they will receive after making payments, and this may lead to additional discussions.
- Businesses will have to face the inconvenience of refunds if an order (project) is cancelled.
- Additional costs (for example, for additional or one-time work) will be added to a separate invoice, which may slightly complicate the processing of payments.
Best practices for tracking prepaid invoices
Here are some guidelines to follow if you plan to use advance payment:
- Consider if advance invoicing is the best option for specific clients or projects (for better customer service that you can personalize)
- Use third party invoicing software to create, send and monitor invoices, such as e-Cont.md
- When doing bookkeeping, make sure you plan effectively and keep accurate records of advance payments.
How to account for advance payments received?
If your business is generating revenue in advance, it is very important to ensure that it is properly accounted for.
An upfront payment invoice is usually suitable for supporting the accounting of both one-off advances and long-term prepaid contracts.
Income received before it is earned is recognized as a liability in accordance with the accrual basis of accounting.
If advance payments are received during the year, they are treated as current liabilities.
Summing up
Invoicing for advence payment is a wise approach to processing customer payments, especially for recurring deliveries or one-time transactions, but it does require attention to make sure you're allocating the right amounts to your revenue. This allows you to get more reliable cash flow forecasts, allowing you to make more informed business decisions.
