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The bigger your business gets, the more complicated your accounting can become.
If you start sending multiple invoices at the same time, you might apply for a loan or cash advance through Shopify Capital to finance an inventory purchase, or start receiving bulk orders from wholesalers, it can get difficult to keep track of money flowing in and out of your accounts.
These transfers of money are known as remittances—whether they’re for completing a purchase, paying back a loan, or even gifting money to others. Remitting money essentially just means sending funds, but when that money shows up in the recipient’s account, it’s not always clear what that transfer was for.
This guide explains what remittance advice is, how it works, and some basic tips for managing the remittance advice process.
What remittance advice means
Remittance advice might sound like some sage wisdom your parent gives you, but really it just means notice of an impending or already processed money transfer, and it generally notes what the transfer is for.
For example, a remittance advice could specify that payment for a particular invoice is on its way via a bank transfer. Or it could be used to let a business know that a credit card payment applies to a specific order. It might help to think of the word advice as an advisory. A remittance advice advises you of a remittance, i.e. a money transfer.
Do businesses need to send remittance advice?
Businesses generally do not need to send remittance advice unless company policy requires it—either their own policy or a customer’s policy. There’s not an overarching law that makes businesses send remittance advice, but in certain areas or sectors, there could be related regulations or guidelines on how remittance advice should be used, such as in the healthcare industry.
Even when not required, however, remittance advice can be an important part of efficient accounting, especially as a business gets more complex. Remittance advice that companies receive often specify key information beyond just the amount paid, such as the check number, PO number, invoice number, distribution center number, store number, etc.
Companies can also include remittance advice when making payments to suppliers. While it might seem like overkill to include a notice at the same time as a payment, it can save time in the long run.
What a remittance advice slip includes
A remittance advice slip typically includes key information about the required payment, which in many ways is similar to what’s included on an invoice.
However, a remittance advice slip can apply to multiple invoices and specifies what a payment is being made for. In other words, an invoice might include information such as the work provided and amount due, but perhaps a vendor sends two invoices to a customer for different orders, and a remittance advice slip might apply to the overarching amount due.
The remittance advice slip also often refers to a detachable strip of paper that can be sent back with the payment, whereas an invoice is for the customer to keep.That said, some businesses might use the term remittance advice slip to apply to electronic remittance advice, not just paper ones.
Either way, a remittance advice slip typically includes the following:
- The payer’s information, e.g., the customer’s name and contact information
- The recipient’s information, e.g., the supplier’s name and contact information
- Invoice number(s), which informs both parties what the payment is being applied to
- The amount due, which could apply to a particular order or be an overarching amount for multiple orders
- Details of what the payment is for, e.g., a description of the goods or services provided and the dates of the order(s) or work performed
- Accepted payment methods/instructions, e.g., letting the customer know how they can pay, such as by check, credit card, or electronic funds transfer, along with payment terms, such as due on receipt.
With a physical remittance advice slip that can be detached and sent back, such as when paying a doctor for their treatment, the patient might fill in the payment instructions. For instance, they might write out their credit card number for the doctor’s office to then process the payment when they receive the remittance advice slip back.
Types of remittance advice and examples
Remittance advice can come in several different formats. The choice can depend on factors such as a company’s technology, such as its use of enterprise resource planning (ERP) software that can facilitate electronic remittance advice.
Customer preferences can also dictate choice, such as how a doctor who sends physical bills in the mail to patients might include a remittance advice slip so the office knows what it’s receiving when the patient sends a payment. Some examples include the following:
EDI remittance advice
Electronic data interchange (EDI) is essentially a digital language that some businesses use to send documents directly from one system to another. With the right software and/or APIs to integrate systems, you can directly view your customers’ remittance advice or send these notices to your suppliers, such as within an ERP system.
Email remittance advice
An email remittance advice can be similar to an EDI remittance advice, but rather than going directly from software platform to software platform, an email remittance advice is just sent over email.
Sometimes emailed remittance advice is a little less formal though, such as if it’s just used to specify which invoice a payment applies to.
Paper remittance advice
Some businesses send paper remittance advice, which can be similar to electronic remittance advice, just in a physical form.
For example, if paying by check in the mail, a business might print and send a paper remittance advice in the same envelope. Or as in the example below, a standard paper remittance advice could be used to specify medical payments.
Removable invoice advice
A removable invoice advice, sometimes called a remittance advice slip, typically refers to a remittance advice form that is attached to an invoice.
The form or slip can be removed by the recipient and sent back with the remittance. For example, a patient might receive a removable invoice advice from their doctor that’s connected to a bill. The top portion of the paper might specify what was charged, while the bottom includes an area that can be cut out and mailed back with the payment.
How does remittance advice differ from proof of payment?
Remittance advice and proof of payment often overlap, but generally these terms differ in the following ways. The key difference is that proof of payment is centered around payment details, while remittance advice often has other information about the relevant orders.
Here are the main differences:
| Remittance Advice | Proof of Payment | |
|---|---|---|
| Purpose | Specify what a payment or money transfer is being made for. | Confirm that a payment has been made. |
| Included Information |
|
|
| Common Use Cases | To let a vendor know that payment is on its way when multiple invoices are outstanding. | To confirm a payment was made and provide evidence for taxes. |
Common challenges with remittance advice
While remittance advice can simplify accounting, they can also introduce some new challenges. Some of the more common ones include:
- Confusion over remittance advice formats: Because there’s no universally accepted remittance advice format, there can be some confusion if different businesses include different information and terminology in their remittance advice. Don’t be afraid to ask customers or vendors what they prefer so you can avoid this issue.
- Interoperability issues when receiving remittance advice: Similar to confusion over different formats, there might be technical issues with receiving remittance advice, based on how the payer wants to send them. For example, EDI remittance advice is popular and convenient, but if a company isn’t set up to receive those remittance advice, such as by having the right ERP software, that can be an issue. So, you may need to adjust your tech stack accordingly.
- Security concerns: Because remittance advice can contain sensitive information, such as bank account numbers, it’s important to consider security measures, much like you would when dealing with actual payments. For example, you might choose an EDI remittance advice software provider that uses encrypted messaging such as via the Secure File Transfer Protocol (SFTP). Or, if sending paper remittance advice, you might minimize the amount of sensitive information included.
Best way to send remittance advice
The best way to send business remittance advice is to ask the other party what they prefer. Sending an EDI remittance advice might be the most efficient method, but that doesn’t do much good if your supplier isn’t equipped to receive that format.
Or, maybe your company is used to sending out paper remittance advice so that feels like the best way, yet that can create risk on your partner’s end, as they then have to manually input the information you sent.
Remember, a remittance advice is meant to simplify accounting and minimize the amount of back-and-forth needed to reconcile payments. So, the best type of remittance advice is the format that’s easiest for the parties involved.
Remittance advice FAQ
What is the meaning of outward remittance advice?
An outward remittance advice is a document that informs the recipient of a payment made, usually for international transfers. It includes details like the amount transferred, the date the payment was made, and the recipient’s account information.
Who receives remittance advice?
The beneficiary or payee receives remittance advice, usually along with the payment notification itself. If you’re sending a business remittance advice, the receiver will likely be accounts receivable.
Why would I receive a remittance?
A remittance is a transfer of money made to you for goods or services or for personal reasons such as supporting family financially. It’s a common method of moving money.
Is remittance advice the same as a receipt?
Remittance advice isn’t the same as receipts. They’re just a way of informing the recipient about the details of the transaction before the actual money shows up. A receipt confirms the payment.
This article is focused on industry standards and descriptions are not specific to Shopify’s financial suite of products. To understand the features of Shopify’s lending products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, is issued by WebBank in the United States.
*Shopify Capital loans must be paid in full within 18 months, and two minimum payments apply within the first two 6 month periods.
This article is focused on industry standards and descriptions are not specific to Shopify’s financial suite of products. To understand the features of Shopify’s lending products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, is issued by WebBank in the United States.
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Credit: Original article published here.