Why Your Business Should Support Prepayments

In business, as in our personal lives, we incur expenses. Expenses are an unavoidable reality when operating any organization. While \”expenses\” often connote something negative, as it\’s the opposite of revenue, there are many ways to turn that frown upside down. 

Prepayment Benefits

Wise business owners and those in the financial suite find creative ways to handle expenses that benefit the business. At the most basic level, the timing of when payments are satisfied can positively impact your tax posture and exposure to avoidable interest fees.

Typical business expenses often include payroll, rent, insurance, equipment, vehicles, etc. Each of these expenses is usually handled differently from one another. 

With health insurance, for example, coverage obligations are annual commitments that are invoiced monthly. Some organizations may opt to prepay their insurance expenses for the year upfront to ensure there won\’t be any lapse in coverage. They may also consider prepayment to be a powerful convenience. 

Another example is the purchase of a company vehicle. While the business may have the cash-on-hand to purchase a car or truck outright, they may elect to take out a low-interest loan to preserve liquidity. However, they can prepay a few months at a time to further reduce their interest fee exposure. 

A third example is purchasing inventory. The bean counters may recommend prepayment on the incoming stock—even well before receipt. This payment would be logged as a credit with the vendor until goods are shipped. The advantage to the customer would be the ability to realize this expense within the current fiscal year instead of the following year. Of course, this is only an advantage if they are hunting for additional write-offs now. But, it\’s great to have the option available should they find it a benefit. 

In addition to the financial perks, there can also be some psychology at play. Prepaying an order with a vendor can solidify a customer\’s position in the queue, should there be a shortage, high demand, or delay in manufacturing. The customer\’s commitment to the vendor is often reciprocated, resulting in the faster receipt of goods and quicker go-to-market time.

There is a lot of perceived value to the customer when a vendor can support the prepayment model. But, not all vendors can offer this.

Supporting Prepayments

To correctly support prepayments, it\’s necessary to rely on high-quality ERP solutions to track the cash. In most organizations, the prepayment funds are sitting on the books as an account credit until debited as goods are shipped or services performed. While simple in concept, inventory levels may not be correctly accounted for if mismanaged, and the accuracy of P&L reports may come into question. 

Prepayments are very much like goods sold regarding their effect on the entire organization. When money laying in wait is tied to stock that either exists or is expected to materialize in the future, cash flow and inventory expectations get out of line. This asymmetry creates confusion among the staff, delayed item replenishment, and, potentially, overall chaos. 

This company-wide impact from prepayments commands the use of a robust ERP solution over simple accounting software. Intentionally designed as the glue between your departments, ERP keeps track of and synchronizes your organization\’s many moving parts.  

ERP platforms like GoldFinch allow you to assign a prepayment percentage for a single order on the sales or purchase order, which will enable you to set a prepayment percentage for a single charge. Or on the payment term, which will allow you to assign it as a default payment term to a customer or vendor account. The invoice can then be satisfied without requiring warehouse shipment or receipt. 

Offering customers a prepayment option may help drive business and increase loyalty. Once set up with the proper infrastructure, handling prepayments can be pain-free. 

Contact Us today to learn more about integrating prepayment automation into your organization. 

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