Most small businesses ask new customers for a deposit before work begins. This is a prudent policy when it is uncertain if the new customer will pay promptly and consistently pay for goods and services provided.
The accountants and bookkeepers have a standard way of recording such deposits that is mumbo-jumbo to most business owners. Their standard method also generally requires you to apply the prepayment to invoices for goods or services that have been provided to customers.
We suggest a simpler way.
Treat the prepayment as a retainer/deposit that is not applied to any invoice. It remains on hand in an amount unchanged. Invoices for goods and service are sent to the customer and the customer is required to settle them in full on the due dates. If the customer does not settle payment on the due date, services and shipments of products are put on hold. You continue to take steps to collect on the unpaid bill.
The customer deposit is held until such time as the customer terminates the relationship with the business and the deposit is refunded.
Alternatively, the business owner can adjust the prepayment depending on any of the following:
- Six months history of prompt payments – refund some or all of the prepayment
- Reduced level of service activity – refund some of the prepayment
- Increased level of service activity – collect more prepayment from the customer
- Termination of relationship with customer – refund all the prepayment
Instead of trying to remember fluctuating dollars and cents by customer, it is much easier to manage prepayment when there is a fixed amount for each customer and it is adjusted infrequently for the reasons above.
You customer my even welcome the reduced administration activity involved on his side also.
A simple QuickBooks Report can be provided to the business owner as often as needed that simply lists the customer name and deposit on hand. The business owner, who is most often in-tune with new customer relationships can quickly review the list and takes steps to make changes to better manager the collection risk..
At Stenson Bookkeeping Simplified we provide bookkeeping training and best practices that make your company and staff the skills to be significantly more effective. Email, text or phone John L Mottram, at email@example.com or 214-543-1855 or go to our website at www.stensonfs.com. We are ready to help you.