An invoice is a legal document requesting payment for products sold or services rendered. It contains the costs of products purchased or services provided and the expected payment date. Invoices are important for tracking sales, accounting, inventory control, and compliance with business regulations.
For companies, an invoice is a formal request for payment in exchange for goods and services. While for consumers, it is proof of purchase, providing clear details on the items bought, the applicable taxes, the date of purchase, etc. Consumers can use it to legitimize warranties and as evidence in legal disputes.
This article covers everything you need to know about an invoice, including its definition, the different types of invoices, plus its purpose and importance in business and finance.
What is an invoice?
As briefly mentioned, an invoice is a formal document companies and other entities use to request payment. This time-stamped document itemizes and records a transaction between a buyer and seller. The key components of an invoice include:
- Invoice number
- The date when the products were purchased or service rendered
- The date of sending the invoice
- Name and contact of seller
- Name and contact of buyer
- Description of each item bought or service provided
- Number of items bought
- Cost per item
- Terms and conditions
- Expected payment date and method of payment
What are the different types of invoices?
Invoices are fundamentally similar but differ in their applications in various business and finance settings. The main types of invoices include:
Standard invoice
A standard or basic invoice is the simplest form of invoice companies send to clients. It has a flexible format, and its use is widespread across various industries. A standard invoice usually contains:
- The buyer’s details (name and contact info)
- The seller's details (name and contact info)
- Invoice number
- Amount owed
Pro forma invoice
Unlike standard invoices, companies send pro forma invoices before delivering products or rendering services. A pro forma invoice gives the client a rough estimate of the cost of service or goods sold. The invoice-able amount may change after delivery of the services or goods.
Credit invoice
A credit invoice, or credit memo, is an invoice companies send clients for refunds, discounts, or similar promotions. It contains a negative payment amount, meaning the company pays the client instead of the client paying the company. Companies use credit invoices to correct invoicing errors or acknowledge returns.
Debit invoice
Companies use debit invoices or debit notes to increase payment amounts they indicated in previous invoices. They're useful for making slight adjustments to existing bills.
For instance, let's say your company worked for a client for X hours, but you later realize your company also worked additional hours for the same client in a different branch. You'll send the client a debit invoice for your extra hours.
Retainer invoice
Companies send retainer invoices to clients for the delivery of products or services in the future. These invoices request prepayments to pre-order products or reserve services for a future date. It's common in the logistics industry as advanced payments to facilitate the logistics company's services.
What is the purpose of invoices?
As mentioned, invoices are extremely important in business and personal financing. The main purposes of invoices include:
A formal request for payment
Businesses use invoices to formally request payment for the products they delivered or goods they offered to clients. By submitting invoices, they exercise their right to payment after fulfilling their end of a transaction.
Bookkeeping
Invoices provide a clear record of companies' sales and consumer purchases so both parties maintain accurate and timely data on their revenue and cash flow. This gives businesses clear insights into their profitability and overall financial health.
Legal proof
Invoices can serve as proof to resolve legal disputes between businesses and their clients. They outline evidence of the terms, conditions, and financial obligations of each party. Failure by one party to meet the terms and obligations can result in legal liability.
Tax documentation and compliance
The HMRC requires all businesses to issue and record invoices when trading goods and services. Invoices are a simple way for companies to report their incomes and ensure compliance with tax and documentation requirements.
Business analysis
Keeping track of invoices will give you a firm understanding of key aspects of running your business. Invoices help you track sales and better understand your cash flow. They also give insight into how your inventory moves for better management.
Maintain customer relations
Invoices improve transparency between businesses and clients, helping maintain cordial relations. Clear and accurate invoices ensure each party understands their obligations in a transaction. This encourages trust and accountability, which is vital for long-term business relationships.
Dispute resolution
It's not uncommon for billing disputes to arise between businesses and their customers. Invoices clearly outline the terms and conditions of transactions, providing a legal basis for resolving disagreements.
Best practices for creating and managing invoices
Timely and accurate invoicing is vital for ensuring prompt payments to maintain cash flow and properly manage inventory. Below are some of the best practices to ensure you create and manage invoices effectively.
Use standard invoice templates
The quality of your invoice is only as good as the template you adopt. As a rule of thumb, only use standard invoice templates that are easy to interpret and accepted by customers across the board. Ensure the invoice has the following key elements:
- Products or service breakdown
- Clear itemization
- Payment amount and terms
- Due date
Provide accurate information
The information you provide in the invoice should accurately reflect the goods you delivered or services rendered. That way, you can avoid disputes and misunderstandings between you and your clients.
Establish clear payment terms
Besides the payment amount, you should also clearly state the payment terms. This includes the date you expect payment, the method of payment, and penalties for late payment. The terms should reasonably accommodate both your financial interests and the client's payment capabilities
Define a clear billing schedule
Sit down with your clients and create a billing schedule that works for both of you. Doing so will ensure consistent payments and help you make proper financial arrangements.
Create a timetable for sending invoices and follow it strictly. That way, you can issue invoices on time and eliminate payment delays that can disrupt your cash flow.
Use invoice automation tools
Invoice automation tools like invoicing software streamline invoicing by creating invoices automatically. The software extracts information from transactions, inventory, and customer databases to create and populate invoices on request. This not only saves time but also ensures accurate and consistent billing.
Invoice automation tools also:
- Eliminate invoicing errors
- Integrates with other business software to update existing records
- Improves efficiency
- Enhances invoice transparency
What if my invoices don’t get paid?
A staggering 87% of businesses receive payments after the due dates indicated in their invoices. Consider the following course of action should your clients fail to pay your invoices.
Send a friendly reminder
The first thing to do when a client misses their invoice payment is to send them a friendly reminder.
Some late payments are honest mistakes, and a simple memo reminding the client to pay is all you need to solve the issue. Be sure to attach the unpaid invoice and only use polite language throughout.
Automate follow-ups
Consider automating follow-ups using invoicing software if the reminder doesn't yield results. The software automatically sends reminders after a specified period, saving you the trouble of doing so manually.
Develop a payment plan
Consider developing a payment plan for the client if they're experiencing cash flow issues. This plan allows them to pay you as per their current budget and is also useful for your financial organization.
A proper payment plan entails:
- Clear payment instructions
- A reasonable installment amount
- Payment duration
- Penalties for late payment
Ensure the payment plan is in writing and you and the client sign it. Also, notify the client this is only a temporary arrangement and won't apply to future transactions.
Issue late fees
Late fees are an effective way to keep clients on their toes. It helps create a sense of urgency, encouraging clients to pay their dues to avoid these penalties.
However, it's worth noting that late fees won't be effective for clients who fail to pay due to cash flow issues. Enforcing late fees in such instances will only worsen the situation.
Reduce manual work and get invoices paid on time with Chaser
Invoices are critical to your business’s financial and inventory management. By implementing clear and sound invoicing policies, you can ensure timely payments, avoid unnecessary disputes, and comply with tax and business regulations.
Don't forget to adopt the above invoicing best practices to ensure steady cash flow and maintain strong client relationships. Talk to the experts at Chaser for help with ensuring your invoices are sent to customers automatically, and get paid on time, or try it for free for 10 days.
