Customer Deposits: Your Small Business Cash Flow Game-Changer

"Good morning, Boss!" —sounds good?

If you dare to take risks and step into the unknown, you can be a "Boss", too. But maintaining that title? That's a different story. We often hear about success stories, but less about the tough struggles that can lead to failure. Being a small business owner isn't as easy as some might believe. Beyond fighting for market share, managing cash flow is a constant battle for small businesses.

Imagine that you have invested your time and effort in delivering exceptional products and services and fulfilling your customers' orders, yet waiting for that final payment from your client can sometimes leave your bank account feeling a little sparse. Your bank account is running low; you need to issue salaries for your staff and pay rent and utilities, and your supplier is chasing you for payment. What can you do besides waiting?

Your sales look promising, but your cash flow is problematic. Could you borrow from the bank or negotiate better terms with creditors to support your operation? Perhaps. However, the chances will be slim if you are new, have a smaller outfit, and have limited resources. You couldn't seek funds from an external source; what's next?

Customer deposits

Although the deposit collected may seem insignificant, you should never underestimate its power. It could be a game-changer.

When we discuss customer deposits, such as 10%, 25%, or even 50% of the total cost, these amounts may not seem like a significant amount of money initially. Especially for big projects, you might think, "That's not the whole payment." However, ignoring these deposits due to their cash value would be a significant mistake for a small business. The real power of these "small" payments isn't just the money they bring in immediately; it's all the other good things they do for your business.

So, what exactly makes these deposits so powerful?

• Proof of commitment.

• Initial expenses covered.

• Boosting your cash flow and easing stress

Proof of commitment

"I'm sorry, there's a change of plan," the client said. "We've got to call off the project."

If there is no legally binding agreement between you, the seller, and the buyer, who will pay for the initial time and effort you put in? Even if there is a legally binding agreement or contract, do you have the financial strength to pursue your legal rights as a small business if the customer refuses to compensate you?

However, if the customer makes a deposit, things will be different. It shows that they are serious and intend to follow through rather than expressing casual interest. A customer deposit is a commitment, a financial stake that encourages them to see the project through to successful completion.

Initial expenses covered

A customer's deposit is more than just a partial payment. It provides the initial capital to purchase materials and equipment, enabling the project to initiate its operations, and covers the cost of expert early work, such as an Analyst Programmer's time to understand user needs.

Boosting your cash flow and easing stress

Cash is vital for any business. A customer's deposit does more than initiate a project; it helps cover the ongoing work and ensures everything runs smoothly. Every dollar available for daily tasks is incredibly important for a small business.

Knowing you have this extra money makes you less worried about finances. It eases your mind and lets you focus on doing great work instead of just trying to make ends meet.

Now that you have collected the deposit, how will you record it in the MoneyWorks accounting software?

Suppose you have prepared the quote outside the accounting software, and the customer pays a deposit based on your quote. In that case, you can enter the deposit directly into the software without using the orders feature. Once you have received payment from the customer, enter a receipt in the accounting software, deposit the money into your preferred bank account, and credit the amount to the deposit received account.

The deposit received is not revenue but a liability in the balance sheet. You park the money temporarily in the deposit account and reverse it to reduce the amount due. For example, if the total sales are $30,000 and the deposit received is $10,000, then the invoice will present as:

Sales: $30,000

Less deposit received: -$10,000

The outstanding balance will be $20,000.

Directly posting to the ledger serves its purpose, but can be confusing when you have many customers, as you must manually track the deposits collected from each one. Another method of collecting deposits is to process them from a sales order.

You can record a sales order with or without a quote. If you prepare your quote in MoneyWorks, you can then convert it to an order.

Entering a sales order is similar to filling out a form. Enter who ordered from you, the date, and what they bought from you. Select "Receive Deposit for Order" from the process order field (at the bottom of the order page), and follow the wizard to record the deposit detail.

Another way of collecting a deposit is through invoicing. For example, a tailor will issue an invoice to the customer and collect a deposit when the customer orders custom clothing. The customer will make the final payment upon collection of their clothing.

Record a customer deposit from the sales invoice.

You can record the deposit by checking the checkbox on the invoice and following the wizard to complete the deposit process. MoneyWorks will record two transactions: a sales invoice to debit the receivable and credit sales revenue, and a receipt to debit the bank and credit the receivable.

Far from being greedy, collecting a deposit is a necessary business practice that protects small businesses and helps them stay financially sound.