What is Advance Invoicing and How to Use It?

What is Advance Invoicing

When it comes to negotiating payment terms, it can be difficult to protect your business interests. The reason for advance billing will determine the type of advance invoicing used. “If your company deals with corporate customers larger than you, You might feel pressured to accept 60- or 90-day payment terms. That’s what suits them,” Andy Smith, founder, and CEO of Abbeygate Accountancy.

The problem is that if you have to pay your business expenses before you get paid by a client, it puts pressure on your cash flow.

Even if you negotiate terms that are acceptable, it is not guaranteed that clients will adhere to them. A recent survey found that 51% of UK businesses were affected by delays in receiving payment for goods or services. In 2020, there will be PS17.5 billion in late payments owed to them.

For some companies, Advance invoicing is the best way to avoid this problem. Customers pay partial or full payment upfront. This article will discuss the main facts regarding advance invoicing. Its advantages and disadvantages are discussed as well as its best uses.

What is advance invoicing?

Advance invoicing is when a company requests partial or full payment from a customer prior to the delivery of goods or services. You can get it in many forms:

  • Before work begins, you must request payment in full.
  • As a deposit, a portion of the invoice value will be required
  • Staged payments may be requested throughout the work delivery process.

The reason for advance billing will determine the type of advance invoice used. But the goal is to lower your risk and make sure you are protected in every case. You have the working capital that you need to start work immediately.

Take, for example, Companies often require payment in full prior to producing a bespoke item or personalized item. Staged payments are a good option when you need to make large, regular payments for materials or services over a longer period of time. If you have limited stock, it is a good idea to ask for a deposit. If your business experiences a high volume of cancellations and you want to decrease that risk.

Also read: What is a Proforma Invoice? and Benefits of Proforma Invoice vs Other Invoice

When should you use advance invoicing?

Advance invoicing is ideal for customers when:

  • Delivering a product or service requires significant upfront costs. Your business will need capital to make this possible.
  • Non-payment is possible. If the order is large or the customer is not known to you, there is a significant risk of non-payment.
  • Limited stock means that customers may wish to reserve a product before delivery.
  • A relationship is ongoing where regular invoices are sent to customers, such as a monthly product subscription or service retainer.
  • High-quality products and services are highly customized. There is a high chance of waste if the customer cancels an order or reduces it before delivery.

Miss Nang Treats is a company that specializes in vegan snacks for cafes and hotels, is Miss Nang Treats. To minimize waste, The business buys raw materials that are perishable items, so advance invoicing is used to minimize the risk of wastage.

Hortense Julienne is the founder of the company. “We typically ask for between 50%-75% of the contract amount upfront and the balance on delivery,” she says. This makes clients less likely to cancel orders and leaves us with unsold stock or unpaid orders.

“For our regular clients, we may extend payment terms. However, as a small company, we rely upon advance invoices since we cannot afford to take wastage risk.”

How to use advance invoicing?

If your company uses advance invoicing It’s crucial to be as precise as possible in your cost estimation as this reduces the risks of being overcharged and having to issue a reimbursement or refund.

You should also correctly record the payment in your accounts. Unearned income is not recorded on the balance sheet. It can be transferred to your income statement only after the product or service has been delivered.

Smith explains, “When you get an advance payment for a job or product that you haven’t finished yet, that payment becomes a liability instead of revenue.”

You will need to debit your cash account and credit your liability account in order to record an advance payment as a liability. Once the work After the work is completed, You can then transfer the earned revenue from the liability account to your income statement.

Advantages of advance invoicing

Businesses can have a better understanding of when they will receive their invoices by sending them earlier. Businesses can protect their cash flow by asking for payment upfront. Smith says that a small number of late payments on large invoices could lead to a business going out of business.

Advance invoicing is a great way to save money, It is easier to automate invoices for small orders, which reduces admin costs and frees up administrative resources. Advance invoicing is sometimes a more convenient option for customers.

Also read: Top 10 Accounting Software for Small Business

Disadvantages of advance invoicing

Advance billing is common in some sectors like PR, marketing, and graphic design where materials and campaigns are unique to one customer. Smith says that advanced billing should not be used in any industry where it isn’t standard practice. It could make your company less appealing to potential customers.

Customers might be uncomfortable paying for a product or service before they receive the final product. You also have the possibility that your invoice might be too low. This could happen if the customer needs an additional product or if the delivery takes longer than expected. You may have to negotiate a higher payment with your customer.

Advance invoicing can also be problematic because it is difficult to update invoices when projects change, but they are based on staged payments. Smith explains that a design firm might begin work on a PS20,000 project, but the scope of the project might change halfway through. In this case, future invoices may need to be canceled or reduced. If you rely on this revenue to run your business, that could pose a problem.

If customers wish to cancel an order or request a refund on an invoice that they have paid in advance, companies using advance invoices should think about how they will handle payments.

Miss Nang’s Julienne says, “If we have to cancel, our contract states payments made as deposits can’t be refunded.” We offer corporate clients the option of a credit on their accounts rather than a refund. Which is more straightforward from an accounting perspective?

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