What is Advance Billing?

When you send a customer a payment before the goods or services are delivered, this is called advance billing. People are billed in advance to pay for things and services before they receive them. They don’t wait until after the services have been provided.

You might have to pay a down payment of a particular portion of the total or the whole bill as an advance payment.

Service companies, like repair technicians or software support providers, often need payments upfront before they send out bills. It’s also common for companies to need significant payments upfront for services like medical procedures, legal fees, building projects, and business-to-business manufacturing.

This way of paying works well for businesses with projects that take a long time to finish or need to pay for the services upfront. It also gives you extra peace of mind when working with customers with bad credit or who might not pay you on time.

Like words

• Bill for advance payment
• Billing ahead of time
• Billing upfront

Examples of Advance Billing

These are some types of advance payments:

• Down Payment: A down payment is a set amount of the service’s total cost. It can be asked for before the services start, and if the customer changes their mind, they usually can’t get their money back.
• Deposit: A deposit is like a down payment; the customer gives it to signify that they will use the service.
• Progress billing: Progress billing is a statement sent when a certain amount of work is finished. Progress payments are standard in software and building projects through the project’s life cycle.
• Prepayment: The customer must pay the total amount before providing services. This is often used for big projects that need a lot of work and funding from the company.
• Recurring payments: Recurring payments, also called “retainers,” are payments that buyers make regularly, like once a month, three times a year, or once a year. For users who have ongoing needs, they can be used to set up a payment plan.
• Partial payment: The customer pays for some of the services upfront and then makes payments regularly until the whole amount is paid off.
• Billing based on the season: Some businesses ask customers to pay ahead of time for a good or service that will be given during that season. For example, companies that cut lawns sometimes need to be paid in advance for the extra work that needs to be done during a particular season.

Why Should You Use Advance Billing?

Companies can get a lot of benefits from billing ahead of time.

• It’s easier to automate. It is much easier to handle advance billing than regular billing. The cost of handling payments can go down with this automation, and customer service can work better.
• Cash flow comes right away for businesses. If a business’s services have a high cost of goods sold (COGS), paying ahead of time can help them get the cash they need.
• Better predictions of income. Service and project-based businesses have a hard time predicting their cash flow. However, billing customers ahead of time can help them better plan their funds.
• Better relationships with customers can be built by giving them more billing choices. By letting customers choose how to pay for goods and services, an advanced payment structure can help businesses build better customer relationships.
• They made it easier to keep customers. Customers who have already committed advance billing are more likely to finish the purchase despite any difficulties that might arise during service delivery.
• Payments were made on time. Businesses get paid faster when they bill ahead of time, so they don’t have to worry about the dunning process later.
• Less likely to not make payments on time. When businesses send bills to customers ahead of time, they avoid bad debt and keep their finances in better shape.

Advantages of Sending Bills Early

The main advantages of advance billing are that it eliminates risk, boosts cash flow, and guarantees payments.

Takes away risk

It lowers the risk of not getting paid, especially when billing is done ahead of time as part of a subscription plan. Subscription-based businesses may count on recurring income, so they must ensure they get paid regularly.

It brings in more cash.

Businesses get their money faster and can use it to fund activities or start new projects when they are billed in advance. This lowers the number of days of sales outstanding (DSO).

Construction companies and businesses with high running costs can’t run without upfront customer payments. These payments cover materials, labor, and other overhead costs.

No chasing late or missed payments

A billing statement that is sent ahead of time builds trust right away. Since customers must invest some money upfront, they are more likely to follow the agreement and complete the purchase.

Companies don’t have to go after people who owe them money or go to court to get repayment, which saves them time and money.

Problems with sending bills ahead of time

Buyers take some risk when they agree to advance payment, so it can be challenging for businesses to get customers on board.

Some problems that come with advance bills are:

• Buyers are hesitant. People may not want to pay for a service (or trust the company providing it) before it has been made or delivered, which makes people unwilling to accept advance payments.
• Problems with refunds. It can be hard to refund customers who have already been billed because businesses may have already spent time and money on projects that are only partly finished when the refund request comes in.
• Costs you didn’t expect. Extra bills may be needed if making or delivering goods or services takes more time or resources than expected. This could make the payment process more difficult and cause delays.
• Cash flow control. Companies that use advance billing may have trouble keeping track of their cash flow because they have to spend and divide the money they receive accurately for future costs.
• There are legal and government issues to think about. Businesses must ensure that the way they bill customers in advance is legal and follows the rules and laws that apply, which may differ based on the location and type of business.
• Problems with communication. When you must pay in advance, you must communicate clearly and openly. If you don’t, misunderstandings about payment terms or project progress can cause unhappy customers and a lot of conflicts.

Better Billing Management

Acknowledging and keeping track of advance payments needs accurate records. Businesses should set up ways to keep track of all the payments they receive. It needs more attention because money was made and received at different accounting times.

How does advance billing work?

Accounts receivable (AR) and accruals are the two main parts of an advance billing statement.

• Accounts Payable (AP): The advanced billing’s AR section will show up on your AR aging report and work like a standard invoice, but it won’t add any income. Instead, the money will be put into your business’s unearned income accrual account.
• Earnings: Accrual-basis accounting keeps track of money a business has made or spent but hasn’t yet been reflected in its financial statements. On the balance sheet, advance payments are seen as assets, just like credit notes.

The unearned income accrual account is a place to put advance payments until customers are paid and invoiced.

How to Figure Out What Kind of Advance Payment You Need

It can be hard to figure out what kind of advance payment to make if some or all project tasks have already been done or the service is ongoing.

Some advance payments are also non-refundable, but customers may be able to get their money back if they are unhappy with the service or want to end their contract. If things have changed since the first deal, the business may need to look at its terms again.

In general, two main types of advance payments are recorded in accounting: earned revenue and unpaid revenue.

• Earned revenue: This is money made from jobs finished in whole or in part that haven’t been billed for yet. It’s written down as “deferred revenue” in the general ledger and needs to be recognized when the bill is sent for payment.
• Unearned revenue: This is money paid for services that have not yet been given or delivered. It’s also written down in the general ledger as “deferred revenue,” but it needs to be recognized when the services that go with it are done.

To be clear, businesses need to set up a deferred income account to keep track of bills that haven’t been paid yet. They still owe the customer a product or service, so the initial payment is considered a debt.

Keeping track of the advance payment

To record the advance payment in your books, take money out of the cash account to make it bigger and put the same amount into the customer savings account.

Remember that debits add to your business’s expenses, assets (like cash or property), and dividend accounts. At the same time, credits take money out of these accounts and add to your liability and equity accounts.

If your client still owes money after delivering the goods or services, send them a statement.

Revenue is recognized when the services are given, and the customer settles their bill, not just when the money is received for the first time.

Finally, write down the following information about the whole deal in your accounting journal:

• Credit for income
• Take money out of accounts receivable
• Take money out of customer savings

How to Include Advance Payments in Financial Statements

Based on the payment type, advance payments will be recorded on the balance sheet or the income statement during the accounting process.

The company lists this amount as a liability on its balance sheet under “unearned revenue.”

Once the related bill has been sent out, earned cash is recorded on the income statement.

Once you send the payment, your accounting software can mark the deal as complete. The balance sheet is updated to show that the unearned revenue has been paid for an invoice and is now part of the accounts receivable for that time.

At the same time, earned income is moved from a line item on the P&L statement that is still ongoing to the amount that is still owed on the invoice.

Automating billing for ahead-of-time billing

With automated bills, it’s much easier to keep track of and handle customer payments. Automation software makes the payment process more accessible and keeps track of payments made in advance.

The billing program can tell what kind of advance payment was made and send bills to customers who still owe money.

One of the best things about automating billing is that it can also handle handling payments, which is one of the main reasons businesses have trouble keeping their cash flow.

When a customer’s payment is approved, automated billing systems can send them an invoice instantly. This way, customers are reminded to pay without worrying about tricking management.