Last editedApr 20232 min read
Managing cash flow and understanding the full range of options for billing customers is really important for businesses of all sizes. As part of the billing process for most companies, invoices are sent after work is completed or services rendered. Advanced billing, however, enables businesses to invoice prior to delivery of goods/services. This can be an excellent risk-reduction strategy, although there are a few drawbacks associated with accounting for advance payments that you should be aware of. Find out everything you need to know about advanced billing and advance payment invoices, right here. Before we get started, let’s learn a little more about the meaning of advance billing.
Advance billing meaning
So, what is advanced billing? In short, when invoices are sent to customers before completion of the service or delivery, it’s referred to as advanced billing. In order to use advanced billing, you’ll need to prepare an advance payment invoice (sometimes referred to simply as an advance invoice) to send to the client. Usually, the invoice is sent at the start of the project. There are various different types of advance payments, including partial payments, deposits, or total lump sum payments. Progress invoicing, for example, is an example of advanced billing.
How to manage advance payment invoices
After sending an advance invoice, businesses can recognize revenue by associating regular invoices over the course of the service rendered. This enables you to recognize income and expenses within the same general ledger. So, how does it work?
Firstly, you need to create an advance invoice.
Typically, advance invoices have two distinct parts: the AR (accounts receivable) section and the accruals section. The AR section functions as a standard invoice, which means that it will show up on your AR aging report. However, rather than crediting one of your revenue accounts, it will credit your designated deferred income accrual account. By contrast, the accrual part of the advance invoice occupies the same role as a credit memo. In essence, the invoice will debit your deferred revenue account, rather than AR.
After you’ve received an advance invoice payment, you need to pay attention to how entries are made in your accounting records.
Firstly, you’ll need to qualify the type of advance payment you’ve received. Advance payments qualify either as earned revenue (if the payment is for goods/services that have been partially or completely delivered, but not invoiced) or unearned revenue (if the payment is for goods/services that will be delivered and invoiced on a future date). Then, you’ll need to complete the posts to the general ledger, and once the products/services associated with the payment have been invoiced, you can apply the payment properly.
Pros and cons of advance invoices
There are a broad range of positive impacts associated with advance invoices:
Reduces your business’s reliance on short-term credit financing options, like bridging loans.
Ensures that your business has a suitable cash flow to deal with operational expenditures.
Makes it easier to automate your billing process and schedule recurring invoices.
However, using advance payment invoices isn’t without issue. Here are a few of the drawbacks associated with advanced billing:
Customers may be unwilling to explore advanced billing, preferring to see value before they make a payment.
If the project is completed under budget or canceled, you may have to issue a refund.
Additional charges associated with the project (i.e., ad hoc work) will need to be billed with a separate invoice, which may complicate the billing process.
Ultimately, while advanced billing can be an intelligent approach to customer billing, it’s important to carefully consider whether it’s the correct approach to certain clients or projects.
Handling advanced billing with GoCardless
GoCardless enables businesses to collect and reconcile payments automatically, either through our dashboard or via your chosen accounting software, like Xero. Because GoCardless gives the opportunity to schedule your invoices and get paid exactly when you expect to, it’s ideal for advance payment invoices. Using Direct Debit and Open Banking to collect payments from your customer’s bank account, GoCardless is an advanced billing payment solution that enables businesses to benefit from more affordable fees, enhanced anti-fraud intelligence, and simple automation.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.