Issuing and Applying Refunds
Overview
Client refunds are cash payments returned to clients from their existing credit balance — instead of applying the credit to future invoices. Refunds reduce your business income and the client’s available credit.
They are always initiated from a credit memo, which acts as the official record of the credit being refunded.
When to Issue Refunds
Scenario | Description |
|---|---|
Client Requests Cash Back | Client prefers a refund instead of holding credit |
Ending the Relationship | Client no longer working with you |
Large Credit Balances | Client unlikely to use the full amount |
Overpayments | Client paid more than billed and wants it back |
Company Policy | Business rules require refunding after a set time |
Refunds vs. Credits: What’s the Right Choice?
Use a Refund When... | Keep as Credit When... |
|---|---|
Client asks for cash back | Client is continuing to work with you |
Client won't return | Credit amount is small |
Credit balance is large | Credit can be applied to upcoming invoices |
Policy requires refund | Client prefers future discount over cash |
Refund Scenarios and Examples
Situation | Process |
|---|---|
Unused service credits | Create credit memo → Issue refund |
Project overpayment | Create credit memo for difference → Refund |
Cancelled product orders | Credit memo for cancelled items → Refund |
Billing error | Credit memo for error → Refund |
Steps to Issue a Refund
Prerequisite
You must have an existing credit memo before issuing a refund. If one does not exist, create a credit memo first.
Step 1: Access the Credit Memo
Go to Clients & Projects
Select the client
Under Sales History, click the Credits tab
Locate the credit memo to be refunded
Step 2: Start the Refund Process
Click the three-dot menu next to the credit memo
Hover over Refund to see your options
Step 3: Choose the Refund Method
Option A: Link to Existing Refund Transaction
Use this if you’ve already issued the refund (e.g., check, PayPal).
Select Link to Transaction
Choose the correct transaction from your list
Click Next to link the refund
Verify amount and click Save to link refund.
Option B: Create Refund Transaction
Use this to create a record of a refund that hasn’t been paid yet.
Click Create Transaction
Verify or adjust the refund date and account
Enter the refund amount
Click Save to create refund transaction
After completing the refund:
The credit memo is marked as Refunded
A refund transaction is recorded in your business account
The client’s Available Credit balance is reduced
Example: Complete Refund Workflow
Scenario: Sarah, a consultant, needs to refund $600 after canceling a retainer contract.
Steps:
Create a credit memo for $600 with the reason “Cancelled retainer – unused portion”
Write and record a check for $600
Go to the credit memo → Select Link to Transaction
Connect it to the recorded check
Refund is now fully documented
Best Practices for Managing Refunds
Always document the reason for the refund clearly in the credit memo.
Communicate with clients immediately when a refund is issued.
Use consistent refund methods (check, ACH, PayPal) for easier tracking.
Track pending refunds to ensure they are followed up on.
Maintain records of linked refunds for audits and financial reporting.
Refund Methods & Considerations
Method | Pros | Cons | Best For |
|---|---|---|---|
Check | Paper trail | Slower, postage | Larger amounts, traditional clients |
ACH/PayPal | Fast, low cost | Needs client info | Ongoing clients, small refunds |
Credit card | Auto reverse | May incur fees | Refunds of recent card payments |
Troubleshooting Refund Issues
Problem | Solution |
|---|---|
Can't find refund option | Confirm a credit memo exists first |
Wrong amount refunded | Create a new credit memo for the difference |
Client didn’t receive funds | Verify payment method and recipient details |
Refund posted in wrong account | Check and edit the transaction's account/category |
Important Considerations
Tax Reporting: Refunds reduce income in the period they’re issued. Track them accordingly.
Cash Flow: Refunds reduce available cash. Ensure you plan for these payouts.
Client Communication: Always notify the client of the refund amount, method, and date.
Audit Trail: Keep all credit memo and refund records for internal and external review.