Picture this: a customer needs a home makeover and happily agrees to use an interior design service after a consultation where they discuss the scope of the project, style and design, layout, paint, furniture, decor, and costs.
There's just one problem: the business doesn't have an invoicing workflow. The customer doesn't know when payments are due, or how to add additional services from the designer onto their project. As a result, miscommunication gives rise to errors and late payments.
Implementing an invoicing system can address these common pain points.
Invoices are an integral component of any business. An invoice documents a written agreement about a transaction between a business and a customer, containing details about how much the customer owes, what products or services the business provided, the date of sale, and the date payment is due.
Invoices are often confused with purchase orders and receipts, but there's a key difference: While purchase orders summarize the goods or services the buyer requests from the seller, and receipts document a sale that has already been made, invoices specifically request payment.
In this post, we will cover the basics of an invoice. You will learn the following:
- What does an invoice look like?
- What is an invoice used for?
- What are the different types of invoices?
Let’s dive in.
What is an invoice?
An invoice is a document issued by a seller to their buyer that itemizes and sums the cost of their transaction. Beyond requesting payment, an invoice is used for keeping transaction records, accounting, tax documentation, and legal protection.
What does an invoice look like?
In this section, we show you what an invoice looks like and define the key components you’ll see on an invoice. Luckily, there are plenty of free invoice templates at your disposal from resources like Adobe Creative Cloud Express, QuickBooks, FreshBooks Invoice Generator, and HubSpot’s Invoice Template Generator.
Every invoice contains key elements that must be included to accurately record the details of the sale, eliminate confusion, and receive timely payment. Though it is critical to get the basics covered, an invoice doesn’t need to be boring — add flair by customizing your invoice design. Businesses can design their invoices so that they are consistent with branding.
1. Business’ name and contact information
The seller’s name should be clearly stated with contact information. Contact information can include address, phone number, and email address.
2. Customer’s name and contact information
The customer’s name should be clearly stated with contact information. Contact information can include address, phone number, and email address.
3. Invoice reference number
Assigning a unique invoice reference number helps with organization and differentiates one invoice from another. It is important to include an invoice reference number for your own records. Invoice numbers are commonly assigned sequentially, chronologically, by customer ID, or by project ID.
4. Date of invoicing
Include the date the invoice was sent for documentation purposes.
5. Payment due date
State the date payment is due to ensure timely payment.
6. Description of services or products
Include the service or product rendered and a brief description. Writing each unique service or product line by line makes the invoice clear.
7. Total amount charged
Include the total amount of payment owed. Even if you include the cost of each line item, clearly stating the sum helps avoid confusion.
8. Payment methods
Clearly state acceptable payment methods. Methods include electronic bank transfers, checks, mobile payment apps, and cash. Including payment methods will help avoid back-and-forth communication and make the transaction process easier.
What is an invoice used for?
At first glance, an invoice can seem like a straightforward document with the sole purpose of recording a transaction, but it can be used for a number of different reasons.
Invoices keep records of transactions. Having transaction records in one place makes it easier for you to track previous sales. If your business sells products, keeping invoices helps with inventory tracking and management.
Invoices are incredibly valuable for accounting purposes. The business and customer can both keep track of payments.
Invoices help you confirm information provided on tax filings. By having a record of sales invoices, your business can accurately report income.
Because invoices confirm products or services provided, they can in many instances protect businesses from false lawsuits. Signed invoices can function as legally binding documents.
Invoices can help you assess your business’ performance and tailor your strategy for growth. Since invoices provide records, analyzing sales metrics can provide insights into your most popular products or services, sales volume, and more.
What are the different types of invoices?
Pro forma invoice
A pro forma invoice is a preliminary bill for a forthcoming sale. Because it is not a confirmation of a sale, a pro forma invoice functions like a quote. However, it is different from a quote in that it is a binding agreement. For example, an event catering business may issue a pro forma invoice to a customer who is using the catering service at a future date.
Rather than collecting a lump sum, an interim invoice breaks the cost into multiple payments over a period of time. If a business is working on a project with multiple parts, an interim invoice can provide a clear payment and services roadmap.
A recurring invoice is an invoice that is set at agreed-upon time intervals. Companies that provide recurring services like babysitting may use a recurring invoice.
A credit invoice is issued when the buyer requests a full refund or partial refund or the seller makes a mistake on the original invoice. The customer returning products, the seller issuing discounts, and the buyer and seller resolving disagreements over pricing are just a few reasons for requesting a refund.
A debit invoice is issued when the buyer has not paid enough. This can happen for a number of reasons: miscommunication, lack of funds, and more.
Past due invoice
A past due invoice is an invoice that collects overdue payment. When customers do not pay by the payment due date, businesses can send a past due invoice to remind the customer to pay.
A commercial invoice is an invoice used to document an international transaction for customs declaration.
Invoices are essential to all businesses, regardless of industry and size.
An invoice may seem like a cumbersome document, but it is an important one. Mastering the basics of invoicing can help businesses keep records, improve efficiency, and provide a better experience for customers. Furthermore, invoices can provide insights into your business’ performance and help you shape your growth strategy. You could opt to use an AP automation tool like Invoice Parser to extract of relevant information from invoices or your invoice processing workflow.
Implementing an invoicing workflow is a no-brainer and thanks to technology, it doesn’t need to be a complicated process.