What is Advance Billing or Advance Payment Invoice?

What are the benefits and risks of advanced billing? 

Advantages of advanced billing

Sending an advance invoice has several perks, including:

• The business is left with enough cash in hand to meet operational expenditures in advance due to early payments
• Due to the funds paid in advance, there is less need to depend on short-term credit, such as bridging loans, to offset expenditures 
• Less time and effort spent in pursuing payments
• Automating billing cycles is simple and easier
• It is easier to set up recurring payments for repeat customers

Risks of advanced billing

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

• Customers could have concerns around the results they will get before they make payments and this may create additional discussions
• Businesses will have to go through the inconvenience of issuing refunds if the project is canceled.
• Additional charges (for example, for extra or ad-hoc work) will get added to a separate invoice, which can complicate and delay payment processing

How to manage advance billing? 

The advance bill or invoice allows your business to accept payment from the customers before the delivery of goods or completion of services. Advance invoicing recognizes revenue throughout the service by creating regular invoices. This allows you to identify the  project’s income and costs in 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 similar 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 the general 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

Here are some practices to follow, if you are planning to switch to advance billing:

• 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? 

If your business gets revenue in advance, it is critical to ensure that it is correctly accounted for. Revenues received before they are earned are recognized as a liability under the accrual accounting system. When advance payments are received within a year, they are recorded as current liabilities.

For accounting an advanced payment, it is essential to debit the cash account and credit the customer’s deposit account with the same amount. Debits increase expenses, dividend accounts, and assets such as cash and equipment, whereas credits reduce these accounts while increasing liability and equity.

Once the service has been performed or goods have been delivered, the business has to send an invoice to the customer. Invoice the amount of the previously paid deposit and deduct it from the total amount owing. Revenue is recorded when services are completely provided and the customer is billed, not when money is received. The transaction should then be recorded in your accounting journal.

To Sum It Up

Advance billing is a wise approach to handle customer payments, particularly for regular services or transactions, but it does require attention to ensure you’re attributing the proper amounts to your revenue. This allows for more reliable and trustworthy cash flow forecasts, allowing you to make more informed business decisions.

FAQs

Q1. 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.

Q2. Are there any disadvantages to sending an advance invoice?

Some of the disadvantages of advance invoicing are:

• Concerns about alienating customers who want to see results before parting with their money
• If the project is canceled or is completed under budget, they will have to go through the hassle of offering refunds
• Additional charges (for example, for extra or unexpected work) may need to be added to a separate invoice, which may delay payment processing

Q3. How do you explain month in advance billing?

With the month in advance billing, you pay at the start of the month and use the service throughout the month.