An invoice is a fundamental element of every business. Without an effective invoicing method, your business’ odds of getting paid on time are much lower than they should be. Whether you are a freelancer or a small business owner, however, the definition, purpose, and usage of an invoice aren’t always clear. That’s why in this post, we will walk you through the ins and outs of invoicing.
What is an invoice?
An invoice is a document that a seller sends to a customer to request payment for products or services. A typical invoice lists what goods or services were provided, how much they cost, which form of payment the seller accepts, and states payment terms for the transaction.
Traditionally, invoices are printed and sent to the customer through mail or fax, but nowadays, they can be sent electronically. Electronic invoices (or e-invoices) are usually the best choice for e-commerce or online businesses, but they can be useful for brick-and-mortar businesses as well. Regardless of whether your invoices are written or electronic, it’s important to keep track of them as they help ensure that you’re getting paid promptly and correctly for your services. That’s why using an effective online invoice management system can simplify and expedite the entire invoicing process for all businesses, including e-commerce and traditional ones.
For a business, the invoice should be listed under accounts receivable. Invoices help you protect your business in the event of an audit as they act as a paper trail for your incoming cash flow. Detailed invoices will show the IRS exactly where your money came from if they question your tax returns.
What does an invoice include?
Creating an invoice is rather simple, but there are some key elements that you have to include with every single invoice you create. These elements are one of the significant differences between an invoice and a receipt. Some examples include:
- The invoice number: Every invoice must come with a unique identifier such as an invoice number, purchase order number, or reference number to distinguish itself from a seller’s other invoices. The invoice number is usually presented in the top (header) section at the top of the document.
- Your business name, logo, and contact information: This section should be nice and clear to ensure the customer can contact you with any questions.
- The customer’s name and contact information: The customer’s contact information must also be included to ensure the document’s legality.
- The supply date: Providing this information can help the seller simplify cataloging.
- The issued date: This date indicates the time that the seller officially records the transaction and bills the client.
- Line items: A detailed description of all purchased goods and services, including price and quantity.
- Sub-total amount: The amount before applying tax rates, fees, and discounts.
- Tax rate (the taxable amount for the products or services), fees, and discounts.
- Total amount: This summary of all charges associated with items or services billed in the line items.
- Payment terms: This section may include all acceptable forms of payment, the due date, and late-payment charges (if any).
How do invoices work?
Now that you know what is an invoice and what does an invoice include, you might be wondering how the invoicing process works. After the customer agrees to purchase goods or services from the seller, here’s what happens next:
- Stage 1: The seller inputs the details of the sale and the parties involved (i.e., the seller and your customer’s businesses) in the invoice — an official request for payment.
- Stage 2: The seller creates the invoice manually or with invoicing software, in paper or electronic form. Then, the seller issues it to the customer.
- Stage 3: Upon receiving the invoice, the customer has a period of time in which they’ve legally agreed to pay the seller. The common due date is 30 days following the invoice date, but this can vary based on the customer’s needs and agreement.
- Stage 4: The customer makes the payment in full, and the seller reconciles the invoice after receiving this payment to complete the transaction.
Types of invoices
There are several types of invoices depending on your business type or the services you provide. The following are the most common types:
- Proposal (or bid): You might need to create a proposal or bid for the work before doing a large or long-term project. The proposal should detail what you expect the services to cost when all is said and done. Keep in mind that you should make it clear to everyone that these are the estimated costs for the work, not the final charge.
- Interim (or progress) invoice: It is a good idea to issue interim invoices that allow your customers to pay for a certain amount of work at a time, rather than in one lump sum at the end of the project. Interim invoices should be followed by one final invoice detailing all the work, including what has been paid for.
- Timesheet invoice: This type of invoice comes into play if your business charges customers for the amount of time they use your services. This type of invoice is common among consultants, psychotherapists, lawyers, and other professionals whose services are difficult to price, or when an item is rented for a specific amount of time (e.g., vehicle rent).
- Pro forma invoice: This is a preliminary bill of sale sent to buyers before delivery or work is completed. This type of invoice is a creation of a sale rather than a confirmation of a sale. This invoice commits to the upcoming goods and services and cannot be used for accounting purposes.
The bottom line
Now you know what is an invoice, the common types of invoices, and their purposes. The invoice is a critical business document that can be difficult to keep track of, but invoicing doesn’t have to be difficult. Creating clear, informative invoices and following a proper invoicing process can increase the likelihood of getting paid on time, as well as increase your business reputation. This action also represents your business appropriately to the IRS in the event of an audit.
AccountDock is a billing history software that helps Stripe-powered businesses provide their customers with clear and systematic billing records. We enable businesses to achieve higher customer satisfaction with a simple tool. When you integrate AccountDock into your business, your customer will then be able to view their billing history, check the status of their payments, and any details behind failed payments. Implementing this software will then increase the chance for your business to get paid on time and correctly and also increase your customers’ happiness.