How to Account for Advance Invoices w/ Examples
February 01, 2023
Advance invoice—is it the solution to halting notorious late payers and saving your operations and profits from falling apart?
It is crucial to find a safety net to ensure you never have to deal with money-related dilemmas again. If you want to find out more about advance invoices and how they can provide excellent leverage for your business, you’ve come to the right place!
This article will tell you everything you need to know regarding this important document and how to create it hassle-free with an online generator!
Let’s dive straight into it!
What is an Advance Invoice?
An advance invoice is a type of invoice issued by sellers or business owners to customers before the latter receives the goods or services they paid for. In response, customers can settle advance payments either by depositing the full amount upfront or by sending a downpayment to settle the total amount indicated in the invoice.
Business owners generally use advance invoices to:
- Ensure the seller when the customer orders a large number of their products.
- Cover the manufacturing costs for certain goods such as wedding cakes, bespoke software, and handcrafted items.
- Enable customers to make reservations on preorder items or goods with limited stocks.
- Serve as a monthly service retainer, as in cell services, utilities, and insurance.
Just like with other invoices, charging advance payments also comes with its own benefits and disadvantages.
Advance Invoice Benefits
- Seller protection. The seller or business owner suffers the consequences caused by a non-paying customer. Charging them upfront effectively prevents non-payments.
- Consistent cash flow. It is critical for a business to have a consistent cash flow to ensure that funds are available to cover supply and production costs and other expenses needed to maintain operations
- Manage expenditure and revenue. Personalized goods tend to be more expensive because of the cost of materials and resources it entails. Advance payments enable the seller to purchase the materials while also balancing their expenses with their profit.
Advance Invoice Disadvantages
- Discounts unforeseen changes in the work process. It is inevitable for some sellers to over or underestimate the costs and materials. They may end up having to bill the customer for extra work or refund the excess payment.
- Intimidates customers. Not all customers are comfortable with paying upfront for services and goods they have yet to see or inspect with their very eyes.
Advance Invoice vs. Standard Invoice
An advance invoice is a standard invoice issued ahead of time. Both types of invoices share the same contents. The distinction between the two is determined by the added accounting requirements for advance billing statements.
Another key indicator that distinguishes an advance invoice from a standard one is the type of transaction or goods sold by the business. Advance payments are not applicable to all types of services and business engagements.
Examples of services and businesses that use advance invoices include utilities, phone service providers, businesses that pay suppliers or manufacturers for their goods as handcrafted items, and bespoke software.
What to Include in an Advance Invoice?
Now that you’re familiar with advance invoices, let’s take a look at what you should include in them!
#1. Business Name and Address
Indicate your business name and address to let your customers know who the invoice is from. Your business contact information should be placed at the top part of your invoice.
#2. Customer Name and Address
Next, you need to add the customer’s contact information. But watch out for mistakes because spelling errors or adding the wrong street number and postal code could lead to your advance invoice being sent to the wrong recipient.
#3. Invoice Number
The invoice number serves as something akin to an ‘identification’ that lets you track and file your invoices more easily.
#4. Invoice Date
The invoice date provides information on when the invoice is issued, along with the period covered by the invoice for the payment.
#5. VAT Details
VAT (Value-Added Tax) details comprise the consumption tax imposed on the goods ordered by your customer. Additional VAT is imposed at every stage involved in creating or producing services and goods.
#6. Services and Products
The services and products section of your advance billing simply enumerates the goods ordered by your customers. It must include the quantity of the product or the duration of the service, along with the corresponding rates and the total amount of their purchase.
#7. Payment Terms Plus Time Frame
Payment terms specify the time period covered by the invoice. This section also indicates the payment due date. For services that involve utilities and insurance, the payment terms will also detail the frequency with which the bill is issued to the customer.
Managing Your Advance Billing
To effectively manage your advance billing, keep these key pointers in mind:
- Monitor the accounts receivable and accrual parts of your advance invoice. The accounts receivable part is akin to a regular invoice which will be reflected in your Aging Report (AR). The AR enumerates and details the total amount of receivables owed by your customers. When a business receives payment for a service or product that is yet to be received by the customer, it is considered a liability. As such, the accrual part is like a credit memo and acts as a debit to your unearned revenue.
- Determine the type of advance payment you are invoicing. Is it earned revenue or unearned revenue? Earned revenue means the payment is given for services or products that have been delivered, whether partially or in full. Unearned revenue means that the payment was made for goods that are yet to be delivered to the customer.
- Make sure that your unearned revenue (also called deferred revenue) account is ready. Doing so ensures your revenue is properly accounted for once you earn it. This happens when you deliver the goods in exchange for the customer’s initial or advance payment.
- Keep your customer accounts organized and updated. By keeping track of your customer’s accounts, it will be easier to regulate your invoices and verify which of your customers have settled their payments.
- Copy previous invoices. Take note that this is only applicable if a customer’s invoicing details are pretty much the same as their last one. It is a common occurrence if you are billing a customer for the same services or the same set of products. Better yet, use an invoice template to reduce the workload.
- Set up recurring invoices to automate the process. Recurring invoices are typical in subscriptions that are billed to the customers monthly, such as utilities, internet, and rent.
- Send late payment reminders. In case a customer misses payment deadlines, send a late payment reminder and follow up as needed.
How to Create an Advance Invoice
Advance billing requires careful preparation. For small businesses, this may be time and energy-consuming, especially if you’re using software like Word or Excel to create invoices.
Fortunately, there is an easy alternative, and that is to use advance invoice templates. These are convenient since they reduce the time it takes to create this important document.
With all the necessary information laid out for you, you can create as many invoices as needed while catering to other financial responsibilities and key undertakings in your business. Simply visit our free invoice generator, fill out the blank fields, and download your document!
Different Types of Invoices
Check out the table below for information on different types of invoices other than advance invoices:
(INSERT TABLE HERE)
As a business owner, issuing advance invoices is an effective way to cut your losses and secure payments from customers. Just remember to include the correct information in your invoice and identify the type of advance payment you are sending.
Weigh the advantages and disadvantages carefully, and determine whether advance invoices are suitable for your business or not.
Lastly, make it a habit to communicate with your customers in a clear and professional manner. This way, following up on customer payments is a breeze.
- Advance invoices are issued to customers before the goods and services they paid for are delivered.
- This type of invoice provides protection for businesses against delinquent accounts or non-paying customers, ensures you get a consistent flow of cash, etc.
- Advance billing has a tendency to oversee possible changes in the work process, thereby potentially adding an extra step to the accounting process.
- An advance invoice typically includes company and client information, payment terms, a breakdown of services and goods, and additional notes.
- The best way to make an advance invoice is to use a free online generator.