Whether you are a novice or an experienced businessman, managing cash flow is imperative for your business. You need to have a clear understanding of the billing options if you want to take your business to the next level. Advance billing is one of the common billing options that you need to be aware of. It is the process of invoicing your customer before providing a service or a job.
What is Advance Billing?
Advance billing is the process of sending invoices to the customer before providing the service or job. This implies that the company will be able to cover the costs associated with the job more easily than if they had to wait until the work is completed.
The company may begin working once the client has paid the deposit, or even provided full payment. An advance invoice should contain:
- The name and address of your company
- The name and address of the client
- A unique invoice number
- The details of the VAT
- Date of invoice
- Clearly defined services and products
- Clear payment terms and time frame
Advance billing Vs Billing in Arrears
Generally, there are two billing options. Advance billing refers to the process when you send invoices to the customers before the work or service is complete, while billing in arrears refers to the process of billing a customer when the work is done. There are many differences between advance billing and billing in arrears. Let’s take a look:
- When you bill in advance, you have the capital to use in your work. However, there are some customers who are not ready to pay upfront before seeing the finished product.
- When you bill in arrears, you have the capability to prove the quality of your work before asking for payment. This makes it an easier way to build trust with your clients. However, you are also required to build trust in clients to pay their bills.
- When you bill in advance, you are not required to worry about following up for payment. However, in case some more materials are required, then you’ll have to charge the customer on a new invoice.
- With billing in the arrears, you are at a high risk of following up with clients for payment. Sometimes the clients make many excuses to make the payment, that is why constant follow-up is required. However, the advantage is that you can include everything related to the work in a single invoice, even if changes take place.
- In advance billing, there is a higher risk of issuing a refund. This can happen when a client cancels a job before it’s completed or when it gets done for less than the original quote.
- In billing in arrears, the chances of refunds are rare because you don’t get payment until the work is completed.
What are the Benefits of Advance Billing?
There are many benefits of advance billing:
- In advance billing, it is easy to automate the billing process as compared to traditional billing.
- The company will have the money to cover the operational costs in advance.
- Time and effort will be saved in chasing the payments
- It gets easier to schedule recurring payments for repeat customers.
How is Advance Billing Managed?
If you want to maintain the cash flow, it is imperative for you to account for advance invoices. Advance invoice is segregated into two parts: 1) the accounts receivable part and 2) the accrual part
The accounts receivable section serves as a regular invoice, this implies that it will get displayed on your AR aging report. Remember that if it is earned within the same financial year as it is received, then it will be considered as a current liability. However, the accrual part is considered as a credit memo and serves as a debit for your deferred revenue account.
Remember that advance payments are classified in terms of whether the goods and services have been delivered or not. If you have a clear idea of what revenue is earned or unearned, it will become easier for you to manage cash flow. This will help you save you from cash-flow crisis.
Type of Advance Payment
The foremost thing to do is to qualify the type of advance payment which further depends on whether or not the goods or services have been delivered or not.
Earned revenue refers to the payment for goods and services that have been partially or completely delivered to the customer. This payment has not been invoiced yet.
Unearned revenue refers to the payment for goods and services that is yet to be delivered and invoiced at a future date and no benefits have been provided to the buyer yet.
You need to create your deferred revenue account. A customer deposit acts as a liability to the business because there is something you ‘owe’ to the customer.
It is important to refer the advance payment to the correct customer account. In case it is a new client, then you will have to create a customer account in the accounting records. However, you need to provide the details for the earned or unearned revenue in that account.
Key Takeaways
- Advance billing is the process of sending invoices to the customer before providing the service or job
- An advance invoice should contain the company’s name and address, client’s name and address, unique invoice number, VAT details, date of invoice, clear description of services and products, and clear payment terms and time frame
- There is a lot of difference between advance billing and billing in arrears
- It is easier to automate the billing process in advance billing; the company has money to cover the operational costs
- The chances of chasing the payments are lesser is advance billing
- There are two parts of the advance invoice; the accounts receivable part and 2) the accrual part
- The AR section acts as a regular invoice whereas the accrual part acts as a cash memo
- Earned revenue refers to the payment for goods and services that have been partially or completely delivered to the customer
- Unearned revenue refers to the payment for goods and services that is yet to be delivered and invoiced
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