An advance is money a customer pays before you deliver. For made-to-order work it is the difference between a healthy business and one that funds its customers' projects from the owner's overdraft.
A Surat textile job worker, a Jaipur furniture maker and a Bengaluru software studio face the same question: how much to ask for upfront, and how to keep track so the final bill is right.
01When to ask for an advance
Ask for an advance when you would be left with costs, or goods nobody else wants, if the customer walked away. Typical cases:
- Made to order
- custom furniture, a fabricated steel structure, a panel board, a printed run of packaging with the customer's brand.
- Materials bought for one job
- a printer buying a special paper, a caterer buying for a wedding.
- New customers
- with no payment history.
- Long projects
- an interior fit-out, a software build, a building contract.
- Services booked in advance
- an event venue, a tour, an annual maintenance contract.
For stock items sold from the shelf to regular dealers, advances are less common. Credit limits do that job. See setting credit limits.
02How much to take
There is no fixed rule, but common practice in Indian trades looks like this:
| Type of work | Typical advance |
|---|---|
| Custom furniture or interiors | 30 to 50 percent |
| Printing and packaging with branding | 50 percent |
| Machine or equipment made to order | 25 to 40 percent, with stage payments |
| Wedding catering, events | 25 to 50 percent at booking |
| Software or design projects | 20 to 40 percent, then milestones |
A good test: the advance should at least cover the materials you buy specifically for this customer. If a Morbi tile maker is producing a special design that only one builder will take, the advance should cover the cost of that production run.
03Put it in writing
Agree the amount, the stages and what happens if the order is cancelled. A short quotation or order confirmation is enough:
"Order: 24 electrical control panels as per drawing dated 12 October. Total ₹6,40,000 plus GST. Advance 40 percent (₹2,56,000) on confirmation. 40 percent on delivery to site. 20 percent on commissioning. Advance not refundable once sheet metal is cut."
04Give a receipt for every advance
When you receive an advance, give the customer a receipt the same day. Under GST law, a registered business that receives an advance against a supply issues a receipt voucher, and keeps a separate account of advances received and adjusted.
A receipt voucher shows your name and GSTIN, a voucher number, the date, the customer's name and GSTIN if they have one, a description of the goods or services, the amount received and the tax details. How GST applies to the advance depends on what you supply, so ask your CA how to treat advances in your trade.
05Set the advance against the final invoice
The final invoice is raised for the full value, and the advance is set against it. The customer then pays only the balance.
For the panel order above:
- Final invoice: ₹6,40,000 plus GST at 18 percent (₹1,15,200), total ₹7,55,200
- Less advance received on 14 October: ₹2,56,000
- Less payment on delivery: ₹2,56,000
- Balance due on commissioning: ₹2,43,200
The mistakes happen when advances sit in a notebook or a WhatsApp chat and nobody sets them against the invoice. The customer is then shown a higher balance than they owe, which sours a good relationship.
06Track open advances
At any time you should be able to answer two questions:
- Which customers have paid an advance that is not yet set against an invoice?
- How much is it in total?
Open advances are money you hold for work not yet delivered. They are a liability, owed to the customer in goods or services. A furniture maker who sees ₹18 lakh of open advances and only ₹6 lakh in the bank has a delivery problem to solve.
07Cancellations and refunds
If a customer cancels, refer to what you agreed. If you refund, refund through the same mode the money came in, record it against the customer, and keep the paperwork. Under GST law a refund voucher is issued where no supply follows an advance. Your CA will advise on the tax adjustment.
08Advances you pay to suppliers
The same logic runs the other way. When you pay a supplier in advance, for example for a special grade of steel or a full truck of cement before a price rise, record it as an advance to that supplier and set it against their bill when it comes.
Keep a short list of advances paid and not yet adjusted. A Vadodara fabrication shop that pays four suppliers in advance each month can easily pay a bill in full and forget the advance already sitting with the supplier. A monthly check of supplier balances, with advances shown, catches this before it becomes a dispute or a lost sum.
09For larger businesses
A project business with 30 open orders needs a list of advances by order, with the stage each order has reached. Set a rule that production does not start until the advance is received and recorded, and make the person who books the order responsible for collecting it. Review open advances older than 90 days each month; they often point to stuck orders.
In MatruOS, an advance is recorded with a receipt voucher and later set against the customer's invoice, so the balance shown to the customer is always the amount they still owe.