Last editedDec 20212 min read
Times are tough for many SMEs right now. Inflation has risen to its highest rate in almost a decade. The cost of materials and labour has increased, and your vendors have had no choice but to raise their prices. Soaring wholesale energy costs have pushed your business utility bills up higher and higher. And although you’ve adjusted your pricing structure accordingly, you’re still grappling with your cash flow.
The key to keeping your cash flow harmonious and maintaining liquidity in the face of rising operational costs is to be cognizant of your billing options. Knowing your options and how they can influence your cash flow can ensure that your business always has access to revenue when paying your expenses. So your business is less likely to rely on credit and incur debt to pay operational costs.
What is an advance invoice?
An advance invoice is one that is sent to the customer or client prior to the work commencing. The company can outline clear terms for payment, and thus glean a better understanding of when they will receive the revenue from the job. This means that they will be able to cover the costs associated with the job more easily than if they had to wait until after the work is completed for payment.
Companies may choose to commence work after the client has paid a deposit, or even made full payment.
Like any invoice, it should contain:
Your company’s name and address
The client’s name and address
A unique invoice number
Your VAT number and VAT details (if applicable)
The invoice date
A clear description of services / products rendered and prices
Clear payment terms and time frame (usually 30 days).
What are the benefits of sending an advance invoice?
Sending an advance invoice has a number of advantages, including:
The company has the capital to cover operational costs in advance
There’s less need to rely on short-term credit like bridging loans to cover costs
Less time and effort are wasted chasing payments
It’s easier to automate billing cycles
It’s easier to schedule recurring payments for repeat customers.
Are there any disadvantages to sending an advance invoice?
While advance invoicing clearly has its advantages, there are a few reasons why companies prefer to invoice in arrears. For instance:
They may worry about alienating customers who want to see progress before parting with their money
If the project is cancelled or comes in under budget, they’ll have to go to the trouble of issuing refunds
Additional charges (e.g. for additional or unforeseen work) will need to be added to a separate invoice, which may complicate payment processing.
How to manage advance invoices
In order to maintain harmonious cash flow, it’s important to properly account for advance invoices.
Advance billing is usually split into two parts— the accounts receivable section and the accrual section.
The former serves as a regular invoice and is logged on your accounts receivable ageing report. If it is earned within the same financial year as it is received, it is recorded as a current liability. The latter acts as a credit memo and is recorded as a debit for your deferred revenue account.
It’s important that advance payments are qualified in terms of whether or not goods and services have been delivered. When you have a clear understanding of what revenue is earned, and what is unearned, you will find it much easier to manage cash flow and meet your obligations without needing to rely on high-interest short-term credit to see you through a cash flow crisis.
We can help
If you’re interested in finding out more about advance payment invoicing, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.