Handling payments is an essential but often complicated part of running a business. For companies that depend on upfront payments, the process can become time-consuming and overwhelming. This challenge is particularly significant as research shows that 60% of small businesses face cash flow issues, threatening their stability and growth (Source: PYMNTS). To address this, Microsoft introduced the Prepayment Customer Invoice Feature in Dynamics 365 Finance. This tool helps businesses streamline the process of managing advance payments, making it easier to track, reconcile, and handle prepayment invoices efficiently.
What Is the Customer Prepayment Invoice?
The Customer Prepayment Invoice is a feature that allows businesses to request advance payments or deposits from customers before delivering goods or services. By collecting funds upfront, it helps businesses cover initial costs, reduce financial risks, and ensure the customer’s commitment to completing the transaction (Microsoft)
Key Characteristics Of the Feature
The Customer Prepayment Invoice Feature in Dynamics 365 Finance makes managing advance payments easier by providing these core benefits:
- Generate invoices specifically for advance payments.
- Receive payments before delivering goods or services.
- Match advance payments with final invoices for accurate recordkeeping.
Benefits That Dynamics 365 Brings for Businesses
| Aspect | Before the Feature | After the Feature |
|---|---|---|
| Invoice Management | Manual, time-consuming processes | Automated and efficient invoicing |
| Cash Flow Management | Limited visibility; prone to missing transactions | Real-time tracking and accurate forecasting |
| Reconciliation | Error-prone and tedious | Seamless and accurate reconciliation |
| Operational Efficiency | Frequent errors and resource-heavy processes | Streamlined workflows and reduced manual effort |
| Financial Compliance | Risk of legal disputes over undocumented payments | Transparent and compliant prepayment records |
| Business Productivity | Wasted time on repetitive administrative tasks | More time for strategic growth and customer focus |
Who Can Benefit from Customer Prepayment?
- Businesses needing upfront payments: Companies offering custom products or services can secure payment before starting work.
- Businesses struggling with manual tracking: A prepayment system simplifies the process, reduces errors, and boosts efficiency.
- Businesses with high-value orders: Taking prepayments lowers the risk of unpaid bills for costly items.
- Businesses with long delivery times: Collecting payments in advance ensures customers are committed and helps cover costs early.
- Businesses wanting clear records: Prepayment management tracks payments and matches them with the final invoice.
Key Challenges of Using the Customer Prepayment
- Complex Setup and Configuration: Setting up prepayments requires detailed configuration across modules like Accounts Receivable, General Ledger, and Sales. Parameters such as prepayment posting profiles and tax codes must be correctly set.
- Tracking and Linking Prepayments: Associating prepayments with the correct invoices or sales orders can be complicated, especially in high-transaction environments.
- Legal and Tax Implications: Different regions have unique regulations for handling prepayments. Failing to comply can lead to fines or legal risks.
- Customer Trust Issues: Customers may hesitate to make prepayments due to trust concerns or fear of fraud, particularly when dealing with newer businesses.
How to Use Customer Prepayment Invoices?
In this guide, we’ll walk you through how to use the new feature effectively, step by step. Follow the steps below for a smooth experience:
Step 1: Enable the Feature
- Go to the Feature Management Workspace
- Search for the Prepayment Customer Invoice feature
- Select the feature and click Enable Now to activate it
Step 2: Set Up Posting
- Navigate to Inventory Management > Setup > Posting > Posting
- Select the main account for customer prepayments in Sales Orders
In this step, you’ll map the account used for prepayments to ensure accurate financial records. Choose the appropriate main account (e.g., 212160) for handling customer prepayments.
Step 3: Set up Number Sequence for Prepayment Process
- Go to Accounts receivable > Setup > Accounts receivable parameters > Number Sequences tab
- Assign number sequence codes for Prepayment invoice, Prepayment invoice voucher, Prepayment invoice reversal, and Prepayment invoice reversal voucher.
This step ensures unique identifiers are assigned to each prepayment document, allowing smooth tracking and error-free management of prepayments.
Step 4: Proceed Sales Order
Path:
- Accounts Receivable > Orders > All sales orders
- Or Sales and Marketing > Sales orders > All sales orders
1. Create sales order and confirm it
- Open the sales order page.
- Enter the required details, such as the customer, product (e.g., “1000”), and quantity (e.g., “1.00”).
- Confirm the sales order.
2. Make prepayment proposal and invoice prepayment
- Before the feature is on:
- Go to the “Invoice” tab.
- Use manual processes to handle prepayments.
- After the feature is on:
- Prepayment options are available under the “Invoice” tab.
- Select “Prepayment proposal” to create a proposal.
- Finalize the “Prepayment invoice” process.
3. Make prepayment proposal
- Prepayment type: Fixed and Percent
- Total prepayment amount: 900
- Sales category: Installation
- Save the proposal and select Prepayment invoice to generate the prepayment invoice.
- Post the prepayment invoice to update the prepayment status.
4. Create prepayment invoice and post it
- Navigate to the Prepayment section.
- Select Prepayment invoice.
- Post the prepayment invoice to finalize the prepayment process.
5. Create customer payment for prepaid invoices
- Path: Account Receivable > Payments > Customer payment journal.
- Select the prepayment invoice and enter the customer payment details.
- Post the payment to apply the prepayment against the invoice.
6. Pick and pack sales order for delivery
- Generate picking list > Update picking list registration > Post the packing slip to prepare the order for delivery
7. Apply prepayment
- Navigate to the “Invoice” tab.
- Select Apply prepayment under the Prepayment section.
- Select the prepayment to apply.
- Click Apply prepayment to match the prepayment with the sales order.
8. Invoice sales order and post it
- Generate the final invoice for the sales order.
- Post the invoice to complete the process.
9. Check voucher transactions of sales order invoice
The prepayment is fully settled with the final sales order invoice until the automation process called “Automated prepayment settlement posting” has finished.
To check the automation process for prepayment posting, follow these steps:
- Path: System administration > Setup > Process automations > Background processes tab
- Click on “Edit” to configure execution details as required. Set the time for the next execution to minute intervals. For example, use a repeat interval of 1 to execute the process every minute.
- Once the automation has been executed successfully, the prepayment invoice is reversed. This reduces the balance of the sales order invoice by the prepayment amount.
Top Common Issues with Prepayment Customer Invoice Feature
1. Forget to apply prepayment against the sales order
If the user forgets to apply the prepayment for the current sales order, the system will show a warning message but will still allow posting the sales order invoice. This prepayment can be applied for future sales orders of the same customer.
What’s great is that there’s an option to automatically apply prepayment against the sales order invoice by setting “Automatic” for Prepayment application policy in the Ledger and sales tax tab of Accounts receivable parameters.
2. Unable to post Prepayment invoice against sales order due to error: “Prepayment invoice functionality is not supported with payment schedule”
The issue occurs when the payment schedule is available for sales orders. Users are restricted from proceeding with prepayment for sales orders that have a payment schedule.
3. No reversal line of prepayment invoice is posted after the “Automated prepayment settlement posting” has ended successfully
The issue happens when the invoice sales order is posted with Summary update set to something other than None. It is because the generated voucher with the summary date does not have a unique ID tied to the sales order, and the automation process fails to link the prepayment to the sales invoice. Currently, prepayment does not work with the summary update scenario.
Conclusion
The Customer Prepayment Customer Invoice Feature is a game-changer for businesses managing advance payments. By streamlining the process, improving financial transparency, and enhancing customer satisfaction. Moreover, this feature helps businesses save time, reduce errors, and focus on what matters most: growth and success.
Looking ahead to 2025, Dynamics 365 is not just a tool for today but a cornerstone for future business success. Discover how Dynamics 365 can drive your next strategic move: Dynamics 365: The Path to Smarter Business Growth.
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Content and Insights by Lindy Do,
our Dynamics 365 Finance Consultant
Lindy Do is a certified Microsoft Dynamics 365 Finance expert with 4 years of hands-on experience. She holds certifications including MB300, MB310, MB330, and MB700, as well as a Microsoft Business Analyst specialization. Through her expertise, Lindy empowers businesses to simplify complex financial workflows and unlock the full potential of Dynamics 365 Finance.
