What Is Advance Billing? Benefits, Best Practices, How to Account for It, & More

Introduction

Running a business in today’s world can be quite challenging. One of the toughest parts is collecting payments from your customers. It can make the already tough job of running a business even tougher. To tackle this problem, there’s a solution called “advance billing.”

Advance billing means getting paid by your customers before you provide them with your products or services. Basically, it means getting your money upfront.

In this article, we’ll cover everything you need to know about advance billing, from its best practices to how to account for advance payments received. We’ll also explore how streamlining your billing process can benefit your business.

What Is Advance Billing?

Advance billing is a smart business strategy where you ask your customers to pay before you give them what they bought. In simple terms, it’s like making sure you receive the money before delivering the goods or services.

It is a proactive approach to payment collection that offers numerous advantages, including improved financial stability, enhanced customer payment management, and greater security in dealing with various customer profiles, ultimately benefiting your business. In the next section we will cover all the benefits in detail.

Benefits of Advance Billing

1. Improved cash flow: Advance billing can significantly boost your company’s cash flow. By receiving payment upfront, you have immediate access to funds, allowing you to cover expenses, invest in growth, or address any financial needs more efficiently.
2. Suitable for lengthy processes: Advance billing is particularly useful when your products or services require more time to be completed. It aligns payment with the start of the process, even if the delivery or service outcome is weeks or months away.
3. Enhanced payment security: Advance billing provides an added layer of security for businesses. It minimizes the risk of customers defaulting on payments or delaying them, especially beneficial when dealing with customers who have a history of poor credit.
4. Reduced dependence on short-term credit: With funds paid upfront, there’s less reliance on short-term credit like bridging loans to cover expenses.
5. Time and effort savings: Advance billing minimizes the time and effort spent chasing payments from customers.
6. Simplified automation: Automating billing cycles becomes simpler and more efficient.
7. Streamlined recurring payments: It’s easier to set up recurring payments for repeat customers, avoiding repetition and ensuring a consistent cash flow.

Drawbacks of Advance Billing

While advance billing certainly has its advantages, there are a few reasons why businesses prefer to invoice in arrears. For instance:

1. Uncertainty for customers: Customers may express concerns about the results they will receive before making payments, leading to potential discussions and uncertainties.
2. Refund hassles: In the event of a project cancellation, businesses will have to navigate the inconvenience of issuing refunds, which can be time-consuming and administratively burdensome.
3. Separate charges: Additional charges, such as those for extra or ad-hoc work, will be added to a separate invoice. This can complicate and delay payment processing, potentially creating confusion for both parties.

How to Manage Advance Billing? 

Advance billing, in the form of an advance bill or invoice, enables your business to collect payments from customers before delivering goods or completing services. This approach recognizes revenue incrementally throughout the service duration by generating regular invoices. 

This not only provides a clearer picture of the project's income and costs but also ensures alignment within the same -general ledger period.

Accounts receivable and accrual are the two distinct parts of an advance bill invoice. The AR part of the invoice behaves similarly to a standard invoice and is displayed in your AR aging report. But it will be posted to your specified deferred income accrual account instead of crediting a revenue account.

Whereas the accrual part is considered as a credit memo. But in this situation, the invoices will be posted with a debit to your specified deferred revenue account instead of a debit to AR.

Accounting for a customer’s advance billing payments demands close attention to how entries are made in accounting records. Typically, the process entails qualifying the type of payment received and then completing the posts to thegeneral ledger. Once the products and services associated with the payment are invoiced, that payment can be applied appropriately.

Best practices to keep track of the advance billing

If you are planning to switch to advance billing here are some practices to follow:

• Consider if advance billing is the best option for specific customers or projects( for better customer experience you can personalize)
• Use third-party invoicing software to create, send, and monitor invoices
• Pay close attention when handling your accounting to verify that you are budgeting advance payments effectively
• Instead of utilizing a reverse entry to account for these transactions, shift advance payments to revenue

How to Account for Advance Payments Received? 

To properly document the advance payment in your financial records, it is necessary to debit the cash account and credit the customer deposits account for the corresponding amount.

Debiting the cash account will result in an increase in expenses, assets (such as cash or equipment), and dividend accounts while crediting the customer deposits account will lead to a decrease in these accounts and an increase in liability and equity accounts for your company.

Once the products or services have been completed, it is essential to send an invoice to the customer to settle any outstanding balance. It is important to note that revenue should be recognized when the services are delivered and the customer has made the payment, rather than when the initial payment is received.

To ensure accurate accounting, it is crucial to record the entire transaction in your accounting journal as follows: – Credit revenues – Debit accounts receivable – Debit customer deposits.

Understanding how to appropriately account for advance payments lays the foundation for effectively reporting them in financial statements.

How to Report Advance Payments Received?

In the reporting process, you record payments on either the balance sheet or income statement, depending on the advance payment type.

For unearned revenue, it’s listed as a liability in the balance sheet under ‘unearned income.’ For earned revenue, it appears in the income statement after invoicing.

Once invoiced, the transaction is updated in your records. Unearned revenue shifts from the balance sheet to accounts receivable. Earned income moves from the P&L statement to balance the invoice.

How Automation Streamlines Your Billing Process

Automation is a powerful tool that can significantly improve the efficiency and accuracy of your billing process. By automating various aspects of billing, such as invoice generation, data entry, and transaction tracking, you can streamline your operations and reduce the risk of errors. 

Here are some of the top benefits of leveraging automation in your billing process:

Cost saving

The upfront cost of setting up an automated billing system might seem high, but in the long run, it brings cost savings in the form of reduced paper usage, fewer errors and rework, and lower FTE costs. 

With automation, you can achieve 70% lower invoicing costs with automated invoice generation and delivery.

Moreover, you can automatically integrate your billing system with A/P portals and accounting systems to deliver invoices through emails, postal mail, fax, etc.

Improved efficiency

As a business grows, its order volume also goes up. Accounting teams may then find it hard to keep up with the billing process for multiple customers. This, in turn, reduces their efficiency and speed of work, resulting in delayed invoices and an increase in the number of delinquent customers.

With an automated billing system, managing a growing customer base and order volume is simpler and more efficient.

Higher accuracy

Manual work often results in errors, and when it happens in the billing process, a company could face huge losses. For example, if there is an error in the bill amount, due date, or inventory sold, it can lead to revenue loss, customer attrition, and bad debt.

Automated billing systems eliminate the need for manual data entry, which can be prone to errors and mistakes. By automating the billing process, businesses can ensure that the right customer is billed the correct amount, reducing the risk of errors and mistakes.

Moreover, automated billing systems can provide real-time data on billing activity, giving businesses greater visibility and control over their billing processes. This can help businesses identify and address errors or discrepancies quickly before they lead to larger problems.

Better customer experience

Billing automation can not only simplify but also offer secure customer onboarding through authenticated emails, SSO, and buyer self-registration. Latest billing automation systems offer self-service portals supporting multiple languages, currencies, and payment formats.

Best-in-class e-invoicing software also allows businesses to send customized emails to customers before their payment due date. The dunning feature makes collections easier by notifying clients about their payments before the deadline.

Data management

An automated billing solution integrates with other systems and ensures that customers’ billing and invoice data are stored in a centralized database. This makes data management much easier compared to traditional billing processes.

Automating billing saves time, and money, and provides a more efficient billing experience. However, achieving optimal results necessitates the establishment of a suitable automated billing system tailored to your business requirements. In the next section we will guide you through the steps of implementing an automated billing system effectively.

How to Set up the Right Automated Billing System for Your Business?

Choosing the right software

Selecting the right automated billing software that meets your business needs and price points is key to achieving your efficiency and ROI goals. Here are a few things you must look at while choosing an automated billing software for your business:

• Offer invoice customization options
• Have tight security protocols
• Should be easy to set up
• Meet global standards

If your business has already moved away from paper checks and invoices, you can skip this step. If not, then e-invoicing should be the first step because e-invoicing reduces billing costs to a considerable degree, even if the workflow is manual.

Finalize billing rules

Once the first two steps are completed, you can set up the billing rules. For example, add rules around late fee charges if the invoice is overdue by ten days or a month.

You can also specify when to create an invoice—when an order is placed or when it is ready to be shipped.

Set up a customer payment portal

Offering a self-service portal enables customers to pay invoices at their preferred time. It also allows them to track invoices, payment due dates, and credit limit balances without having to contact your team. This saves your team time and effort as well.

How HighRadius Streamlines Your Billing Process?

HighRadius’ AI-based E-Invoicing and Payment Software offers a seamless solution for billing and payments through automated invoice delivery. With its self-service portal for your customers, you can reduce payment friction and increase customer satisfaction.

The software not only generates invoices automatically but also allows customization to align with your branding. Simplifying matters further, it seamlessly integrates with your A/P portals, including SAP Ariba and Coupa, as well as accounting systems such as QuickBooks and Sage, enabling invoice delivery through various channels like email, postal mail, and fax.

You can effortlessly accept payments using 150+ global payment options, encompassing ACH, credit cards, SEPA, Giropay, and more, catering to customers worldwide through our top-tier EIPP software. Additionally, the software enables you to incorporate guest payment links within dunning emails, courtesy of HighRadius’ e-invoicing solution.

Furthermore, with this software, you empower your customers to schedule payments, make partial payments, pay in installments, and support intricate customer hierarchies, including parent-child relationships.

This approach ensures an enhanced customer experience by providing secure, flexible, and tailored payment links, all made possible by HighRadius’ AI-driven EIPP software.

FAQs

1). What is an example of billing in advance?

Advance billing, also known as billing in advance, entails the practice of issuing an invoice to customers before the delivery of the products or services they have purchased. Advance billing examples encompass deposits, where a customer pays in advance to secure goods or services for a future date. For instance, a customer might place a deposit for a customized piece of machinery that necessitates time for completion and delivery.

2). What is advance vs arrears billing?

Advance billing invoicing is a practice in which a product or service is billed before its provision. Conversely, arrears billing invoicing refers to the billing of a product or service after its provision.

3). What is the purpose of advance payment?

The purpose of advance payments is to protect sellers against non-payment or to address expenditures associated with services or products.

4). What are the risks of advance payments?

One big risk when paying in advance for customers is if the seller doesn’t do what they promised, customers could have problems. Also, if the company they gave their money to goes out of business, it can be hard for customers to get their money back.

5). Is advance billing deferred revenue?

Yes, advance billing is deferred revenue. Deferred revenue or unearned revenue, refers to payments received in advance for goods or services that will be delivered or done in the future.