Invoice-First Workflow

The Invoice-First Workflow handles situations where you receive and must pay a supplier invoice before the goods are physically delivered. This is common in international trade, prepayment arrangements, and certain supplier relationships where payment is required upfront.

When to Use Invoice-First Workflow

This workflow is necessary for:

• Import purchases requiring prepayment or deposit
• Custom manufacturing requiring advance payment
• Special orders with payment before production
• Cash-on-delivery terms where invoice/payment precedes delivery
• Proforma invoice payments for international shipments
• Supplier credit terms requiring advance payment
• High-demand items where supplier requires payment to secure stock

When NOT to Use This Workflow

Avoid this workflow for:

• Standard local purchases with normal credit terms
• Suppliers with poor track record (risk of non-delivery)
• High-value purchases without purchase protection
• Situations where goods are immediately available

For standard purchases, use Standard Procurement Workflow.

Process Flow

Step 1: Create PO → Step 2: Receive Proforma/Invoice → Step 3: Process Prepayment → Step 4: Track Shipment → Step 5: Receive Goods → Step 6: Settle Final Invoice
    ↓                   ↓                                 ↓                         ↓                   ↓                   ↓
Order Placed      Supplier Sends Invoice         Make Advance Payment      Monitor Delivery    Create GRN          Clear Prepayment
Agreement Made    (before delivery)              Record as Prepaid         Track Status        Update Stock        Final Settlement

Step 1: Create Purchase Order

Responsible Role: Purchasing Admin

Standard PO Creation

Follow normal PO creation process:

Navigation: [Purchasing > Purchase Orders > New PO]

PO Details

• Supplier: Select supplier
• Payment Terms: Note prepayment requirement
  • Example: “50% advance, 50% on delivery”
  • Example: “100% prepayment required”
• Delivery Terms: Note shipping arrangement
  • FOB, CIF, EXW, etc.
• Expected Delivery: Estimated arrival date
• Items and quantities: As per requirement

Special Notations

In PO remarks/notes, clearly state:

• “Prepayment required per supplier terms”
• Prepayment percentage and amount
• When balance is due
• Delivery schedule
• Shipment tracking requirements

Approval Process

PO requiring prepayment may need additional approval:

Enhanced approval for:

• First-time prepayment to supplier
• Large prepayment amounts
• High-risk suppliers
• International prepayments

Additional checks:

• Supplier track record verified
• Prepayment is standard in this industry/region
• Purchase protection considered
• Delivery date is realistic
• Budget available for prepayment

Step 2: Receive Proforma Invoice or Tax Invoice

Responsible Role: Purchasing Admin / Accounts Payable

Proforma Invoice vs. Tax Invoice

Proforma Invoice

• Purpose: Advance notice of charges, payment request
• Characteristics:
  • Labeled “Proforma Invoice”
  • Shows what will be charged
  • Not a valid tax invoice for input tax claim
  • Used for prepayment
• Common in: International trade, custom orders

Tax Invoice (in advance)

• Purpose: Formal invoice requiring payment before delivery
• Characteristics:
  • Valid tax invoice format
  • Can claim input tax when paid
  • Legal invoice document
  • Supplier records as sale
• Common in: Prepayment terms, COD arrangements

Document Review

When invoice received:

Verify Against PO

• Supplier name matches
• PO number is referenced
• Item descriptions match
• Quantities match
• Prices match agreed prices
• Total amount matches PO
• Payment terms stated

Check Payment Requirements

• Payment amount (full or partial)
• Payment deadline
• Payment method accepted
• Bank account details
• Payment reference required

Identify Issues Early

• Price increases since PO
• Freight charges not previously mentioned
• Additional fees or surcharges
• Different payment terms than agreed

Step 3: Process Prepayment Invoice

Responsible Role: Accounts Payable

Navigation

[Purchasing > Purchase Invoices > New Prepayment Invoice]

or

[Accounts Payable > Supplier Prepayments > New Prepayment]

Invoice Entry

Invoice Header

• Invoice Type: Select “Prepayment” or “Proforma”
• Invoice Number: From supplier invoice
• Invoice Date: Date on invoice
• Payment Due Date: When payment required
• Supplier: Select supplier
• PO Reference: Link to PO
• Currency: Match invoice currency

Invoice Lines

Enter items as per invoice:

• Items from PO
• Quantities
• Prices
• Tax codes
• Total amount

Prepayment Specifics

• Prepayment %: E.g., 50% advance
• Prepayment Amount: Calculated or manual
• Balance Amount: Remaining amount due on delivery
• Expected Delivery: When goods will arrive

Accounting Treatment

Critical: Prepayment is NOT an expense yet; it’s an asset (advance payment to supplier).

Accounting Entry on Payment

Debit: Prepayments - Supplier          $10,000
Debit: Withholding Tax (if applicable)     $500
Credit: Bank Account                             $10,000
Credit: WHT Payable                                 $500

Not this (wrong):

Debit: Purchase Expense    $10,000  ← Wrong! Goods not received yet
Credit: Bank                        $10,000

Approval Workflow

Prepayment invoices require careful approval:

Standard Checks

• Matches approved PO
• Amount is correct prepayment %
• Supplier bank details verified
• Delivery timeline confirmed
• Budget available

Enhanced Checks for High Value

• Supplier financial stability verified
• Delivery penalties agreed
• Insurance or trade protection considered
• Alternative suppliers considered
• Business case strong

Payment Processing

Payment Authorization

• Additional authorization often required for prepayments
• Dual authorization: Two signatories for large prepayments
• Board approval: Very large prepayments

Payment Execution

1. Verify bank details (call supplier to confirm)
2. Process payment:
   • Bank transfer (most common for international)
   • Letter of credit (for large imports)
   • Escrow (for high-risk purchases)
3. Record payment in system
4. Save payment confirmation
5. Send copy to supplier

Payment Confirmation to Supplier

Send:

• Payment confirmation/receipt
• Payment reference number
• Request: Delivery schedule confirmation
• Request: Tracking information when shipped

Step 4: Track Shipment and Pending Delivery

Responsible Role: Purchasing Admin

Create Tracking Record

Navigation: [Purchasing > Pending Deliveries > Track Shipment]

Tracking Information

• PO Number: Original PO
• Prepayment Reference: Prepayment invoice number
• Supplier: Supplier name
• Expected Ship Date: When supplier will ship
• Expected Arrival: When goods will arrive
• Shipment Method: Sea, air, land freight
• Tracking Number: AWB, BL, tracking number (when available)

Communication Log

Maintain log of communications:

• Dates contacted
• Response received
• Delivery updates
• Issues and resolutions

Regular Follow-Up

Follow-Up Schedule

Escalation Triggers

Escalate to management if:

• No response from supplier after payment
• Significant delay beyond promised date
• Changed delivery terms without agreement
• Quality concerns reported
• Supplier financial issues discovered

Documentation

Keep organized file:

• Original PO
• Proforma/tax invoice
• Payment proof
• All email communications
• Shipping documents (when received)
• Tracking screenshots

Step 5: Receive Goods at Warehouse

Responsible Role: Warehouse Staff

Pre-Arrival Preparation

When shipment is arriving:

Warehouse Notification

• Alert warehouse staff: Delivery expected
• Provide PO copy: For reference
• Special instructions: If any
• Inspection requirements: Quality checks needed

Documentation Ready

• Original PO
• Prepayment invoice
• Packing list (from supplier)
• Import documents (for international shipments)

Physical Receipt

Same as standard GRN process:

Navigation: [Purchasing > Goods Receipt > New GRN]

Verify Delivery Documents

• Delivery order/bill of lading
• Packing list
• Certificate of origin (if import)
• Quality certificates
• Customs clearance documents (if import)

Physical Inspection

• Count all items
• Check for damage
• Verify correct items delivered
• Check quality
• Scan serial numbers

GRN Creation

• Link to PO: Select original PO
• Note prepayment: Reference prepayment in remarks
• Enter quantities: Actual received quantities
• Attach documents: DO, packing list, photos
• Confirm GRN: Create goods receipt

Handling Discrepancies

Short Delivery

Scenario: Ordered 100, received 80

Actions:

1. Create GRN for 80 received
2. Note 20 short
3. Contact supplier immediately
4. Determine: Will balance be delivered?
5. If yes: Wait for balance, keep PO open
6. If no: Request refund of prepayment for 20 units

Damaged Goods

Scenario: Items damaged in transit

Actions:

1. Document damage (photos, videos)
2. Get delivery driver to acknowledge
3. Create GRN for good items only
4. Reject damaged items
5. Contact supplier immediately
6. Claim: Replacement or refund
7. Insurance claim: If insured

Wrong Items

Scenario: Different items than ordered

Actions:

1. Do NOT accept wrong items
2. Reject delivery or hold in quarantine
3. Contact supplier immediately
4. Demand: Correct items or refund
5. Consider: Cancellation if significant breach

Step 6: Settle Final Invoice and Clear Prepayment

Responsible Role: Accounts Payable

Final Invoice Processing

Full Prepayment Scenario (100% prepaid)

If you’ve paid 100% in advance:

Navigation: [Purchasing > Purchase Invoices > Link to Prepayment]

1. Create final invoice:
   • Link to GRN
   • Link to prepayment invoice
   • Amount = GRN value
2. System clears prepayment:

   Debit: Purchase Expense / Inventory   $10,000
   Credit: Prepayments - Supplier                 $10,000
3. No payment needed: Already paid
4. Close transaction: PO, GRN, invoice all closed

Partial Prepayment Scenario (e.g., 50% prepaid)

If you’ve paid 50% advance, 50% on delivery:

Example:

• Total order: $20,000
• Prepaid: $10,000
• Balance due: $10,000

Process:

1. Receive supplier’s final invoice for $20,000
2. Enter full invoice:
   • Link to PO and GRN
   • Link to prepayment
   • Total: $20,000
3. System applies prepayment:

   Debit: Purchase Expense / Inventory   $20,000
   Credit: Prepayments - Supplier                 $10,000
   Credit: Accounts Payable                       $10,000
4. Pay balance: $10,000 per delivery terms
5. Close transaction: All complete

Reconciliation

Verify everything matches:

Handling Variances

Scenario: Received Less Than Ordered

Example:

• Ordered and prepaid: $10,000 (100 units)
• Received: 80 units ($8,000 value)
• Shortfall: 20 units ($2,000)

Actions:

1. Create invoice for what received: $8,000
2. Apply prepayment: $8,000
3. Prepayment balance: $2,000 remains
4. Options:
   • Option A: Wait for balance delivery, keep prepayment credit
   • Option B: Request refund of $2,000
5. Record decision in system

Scenario: Price Changed on Final Invoice

Example:

• Proforma invoice (prepaid): $10,000
• Final tax invoice: $11,000 (freight added)

Actions:

1. Verify change is legitimate
2. If agreed additional charges:
   • Enter final invoice: $11,000
   • Apply prepayment: $10,000
   • Pay balance: $1,000
3. If NOT agreed:
   • Query with supplier
   • Negotiate
   • Demand original price
4. Get approval for variance

Special Scenarios

Scenario 1: Import Purchase with 50% Prepayment

Purchase: Machinery from overseas supplier Value: $50,000 Terms: 50% advance, 50% before shipment

Timeline:

Day 1: PO created and approved

Day 7: Proforma invoice received for $50,000

Day 10:

• Process prepayment invoice: $25,000
• Pay 50% advance: $25,000
• Accounting: Debit Prepayments $25,000

Day 45: Supplier confirms ready to ship, sends invoice for balance

Day 47:

• Pay remaining 50%: $25,000
• Supplier ships machinery

Day 77: Machinery arrives at port

Day 80: Customs cleared, delivered to warehouse

Day 81:

• Create GRN: $50,000
• Physical inspection: Complete
• System clears prepayment:

  Debit: Fixed Assets - Machinery    $50,000
  Credit: Prepayments                         $50,000
• Transaction complete

Scenario 2: Prepayment but Supplier Fails to Deliver

Situation: Paid 100% prepayment, supplier goes bankrupt before delivery

Actions:

Immediate:

1. Identify issue immediately (no response, news of insolvency)
2. Escalate to senior management
3. Consult legal counsel

Recovery Efforts:

1. Contact supplier: Attempt communication
2. Demand letter: Legal demand for refund or delivery
3. Bankruptcy claim: File claim in bankruptcy proceedings
4. Insurance claim: If purchase was insured
5. Legal action: Lawsuit if applicable

Accounting:

1. Recognize potential loss:

   Debit: Bad Debt / Purchase Loss    $10,000
   Credit: Prepayments                         $10,000
2. Subsequent recovery (if any):

   Debit: Bank                         $3,000
   Credit: Recovery Income                     $3,000

Lessons:

• Verify supplier financial stability before prepaying
• Use trade insurance for large prepayments
• Consider letters of credit for protection
• Never prepay 100% without strong trust/protection

Scenario 3: Custom Manufacturing with Milestone Payments

Purchase: Custom equipment with 3 milestone payments Value: $100,000 Terms: 30% on order, 40% on completion, 30% on delivery

Payment Structure:

Milestone 1: Order Confirmation

• Payment: $30,000
• Trigger: PO signed
• Accounting: Debit Prepayments $30,000

Milestone 2: Manufacturing Complete

• Payment: $40,000
• Trigger: Supplier provides completion certificate and photos
• Accounting: Debit Prepayments $40,000 (total now $70,000)

Milestone 3: Delivery and Installation

• Payment: $30,000
• Trigger: Equipment delivered, installed, and tested
• Accounting:
  • Create GRN: $100,000
  • Clear prepayments: $70,000
  • Pay final: $30,000
  • Result: Equipment capitalized $100,000

Controls:

• Each payment requires proof of milestone completion
• Quality inspection at each milestone
• Right to withhold payment if issues
• Final payment only after full acceptance

Best Practices

For Purchasing

1. Verify supplier reliability before prepaying
2. Negotiate payment terms: Avoid 100% prepayment if possible
3. Get delivery guarantees: Penalty clauses for late delivery
4. Use payment protection: Letters of credit, escrow, insurance
5. Document everything: All communications, agreements, changes

For Accounts Payable

1. Always use prepayment account: Never expense before goods received
2. Track prepayments carefully: Regular reconciliation
3. Follow up on old prepayments: Aged prepayments = potential issues
4. Verify bank details: Especially for new suppliers
5. Document application: Clear trail when clearing prepayment

For Management

1. Set prepayment policies: When acceptable, limits, approvals
2. Approve prepayments carefully: Extra scrutiny
3. Monitor supplier performance: Track delivery vs. promise
4. Manage risk: Insurance, diversification, supplier assessment
5. Review aged prepayments: Monthly review of outstanding

Controls and Compliance

Key Control Points

1. Prepayment Authorization

• Higher approval level than normal PO
• Business justification required
• Supplier vetting mandatory

2. Payment Verification

• Verify bank account with supplier (phone)
• Dual authorization for large amounts
• Payment confirmation retained

3. Delivery Tracking

• Active tracking system
• Regular follow-up schedule
• Escalation process for delays

4. Reconciliation

• Monthly prepayment reconciliation
• Aged prepayment review
• Follow-up on outstanding

5. Accounting Treatment

• Proper use of prepayment accounts
• Timely clearing upon delivery
• Correct period recognition

Monthly Compliance Checklist

• All prepayments have corresponding POs
• All prepayments properly authorized
• Delivery tracking current
• No unexplained aged prepayments
• Prepayments cleared upon delivery
• Variances documented and approved
• Loss provisions for problematic prepayments

Related Documentation

Workflows

• Standard Procurement Workflow - Standard PO process
• Direct GRN Workflow - Direct goods receipt
• Direct Invoice Workflow - Service purchases

Daily Operations

• Creating Purchase Orders - PO creation guide
• Goods Received Note Processing - GRN procedures
• Purchase Invoice Processing - Invoice matching

Module Documentation

• Purchasing Module - Complete purchasing features
• Financial Accounting Module - Prepayment accounting
• Supplier Maintenance - Supplier management