How should small manufacturers track deposits, progress billing and inventory purchases?
Deposits aren’t revenue until you deliver. When a customer pays upfront for a custom manufacturing order, that payment goes to a deferred revenue account on your balance sheet. It’s a liability because you owe them a product. Recording deposits as sales immediately throws off your income statement and creates accounts receivable that don’t reflect what’s actually collectible.
Progress billing should match work completed. If you’re invoicing customers at production milestones, each bill converts a portion of deferred revenue to earned sales. The first progress invoice might cover 30% of the contract value when materials arrive and production begins. Another invoice at 60% complete, final invoice at delivery. This keeps revenue recognition aligned with what you’ve actually produced.
Inventory timing matters just as much. Materials purchased for a job go to your inventory account, not cost of goods sold. They stay in inventory until the finished product ships. Expensing materials at purchase while recognizing revenue months later makes your margins look wrong in both periods. Proper inventory accounting matches material costs to the same period when you recognize related revenue.
Purchase orders help you track committed costs. You’ve agreed to buy $15,000 in raw materials for a customer order. The supplier hasn’t invoiced yet, but that cash is spoken for. Without PO tracking, your available cash looks higher than reality. With it, you can see true liquidity and make better decisions about taking on additional orders.
The whole system connects. A customer deposits $20,000. You record it as a liability. You issue a PO for materials. Materials arrive and hit inventory. As production progresses, invoices convert deferred revenue to sales. At shipment, inventory moves to COGS and remaining deferred revenue becomes earned revenue. Each transaction lands in the right account at the right time.
Small manufacturers often struggle with this because recording deposits as sales and materials as expenses seems simpler. It is simpler in the moment. But it creates month-over-month volatility that hides true job profitability and complicates business tax preparation when it matters most. Getting the setup right from the start means your books tell you what you actually made on each order.
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