Your accounts receivable strategy is likely based around making sure your customer accounts are fully settled in a reasonable time. There are many ways to accomplish this, but ultimately, businesses want to feed their cash flow and fuel growth.
That’s why some companies are turning to advance billing to enhance A/R key performance indicators. By billing customers before work is completed, you’re increasing the possibility that an account will be paid on time.
In this blog, we’ll take a deep dive into advance billing and how it can help get your bills paid quickly and positively impact cash flow.
What Is an Advance Payment?
Advance payments are completed before a product is delivered or a service is provided. It often includes the full billing amount and the account is settled when the service is rendered. In contrast to billing in arrears, this requires the customer to pre-pay and may be required before delivery of the final product.
It also serves as a form of a guarantee to your customer, although it does have some caveats. Changes in scope or services may require additional billing or refunds, so that may require close tracking to ensure that the terms of the agreement are met.
Types of Advance Payments
Advance billing breaks down revenue into two distinct categories: earned and unearned. Both affect cash flow, but should be separated for accounting purposes
- Earned revenue is payments not yet received for goods or services that have been delivered. This may be for full or partial delivery.
- Unearned revenue is payments received for work yet to be completed. The merchant has yet to fulfill their part of the agreement, so the revenue has yet to account for the cost of goods or services provided.
For accounting requirements, earned and unearned revenue should be kept apart. Earned revenue is free and in the clear and should be considered pure profit. Unearned has a future cost associated with it.
The Benefits of Advance Billing
One of the biggest day-to-day risks a company takes is providing a product or service up front with the promise of being paid for their work. Now, far more often than not accounts are settled and all parties are made whole. However, businesses voluntarily take on this burden and get nothing in return. Advance billing removes these concerns and changes the burden to doing what the company does best – delivering their product.
Advance billing also increases your cash flow. It reduces risks to the company by giving it the working capital it needs to meet debt obligations, continue operations, or grow the business. You are financed up front and don’t have to chase late payments or non-payments, freeing up even more resources.
How To Account for Advance Payments
As mentioned above, advance billing requires an additional accounting step. Step one includes the regular invoicing process. The bill is sent as any other invoice and should be included on your A/R ledger.
The second step is the accrual. This is a credit memo and should be listed as a liability as there are outstanding payments (goods or services) that the company owes. Once the customer accepts delivery or the project is closed, the account is settled.
Automation for Hassle-Free Advance Billing
Much of the complexity of advance billing is removed by automating A/R operations. By using a SaaS solution like Invoiced to streamline the payment process, businesses make the sending and receiving payments easier, for the company and customers.
Invoiced has solutions for you A/R needs: