What is an invoice?
An invoice is a document sent from a business to a customer or client requesting payment after a good or service has been delivered. Essentially, an invoice is a request for payment as well as a detailed breakdown of what services were rendered for the given billing cycle, what the unit price was, and other details that can vary from one invoice to the next and across various industries. Many invoices also feature details about payment terms, including how payment should be made, when it’s due, and other important details.
When a business issues an invoice (invoicing), the amount of the invoice is added to their accounts receivable (AR)—the money that’s owed to them based on goods or services they’ve already delivered. When a company receives an invoice, it’s added to their accounts payable (AP)—money they owe based on goods or services they’ve already received.
Invoices aren’t just important for requesting payment or receiving payment details, they’re also important to serve as a record of payments and payment requests. IRS audits, for example, will require a business to provide organized and numbered invoices to explain where money came from and where it went.
Types of invoices
Invoice/Final Invoice: A regular invoice is sent to a buyer confirming that a sale has occurred to request payment.
Sales Invoice: Another name for an invoice or final invoice—the final bill.
Pro Forma Invoice: A simple invoice that comes after a quote or estimate on goods/services, but before the final invoice. The pro forma invoice lists the order details so that the buyer can review the final costs and verify that the terms of the sale match what was agreed upon.
Preliminary Invoice: Pro forma invoices are sometimes referred to as preliminary invoices, but there can be other types of preliminary invoices. Preliminary invoices serves to inform and validate details before the final invoice is sent.
Commercial Invoice: When shipping internationally, the seller can send a commercial invoice along with the shipment. The purpose is to allow foreign or U.S. customs officials to identify what is in the shipment and to calculate any taxes and duties that apply.
Retainer invoice: A retainer invoice is an invoice that a business would send a client before a project has started. This sounds like something a company would use a pro forma invoice for, but the difference is that retainer invoices are essentially securing services by providing a deposit or payment.
Credit Memo: A refund on a final invoice in the case of damaged items or clerical error after final invoice was sent.
Timesheet invoice: Individuals paid with an hourly wage will use a timesheet invoice to receive payment for the hours they worked. Their timesheet invoice will reflect the number of hours they worked alongside their standard rate of pay. Businesses that have contractors on retainer, like lawyers, consultants, or agencies, use timesheet invoices.
What isn’t an invoice?
The business and accounting worlds are filled with a wide range of financial documents, so it’s important to understand the distinction between what an invoice is and what it is not.
A bill, for example, is different from an invoice. A bill is sent when the sender expects immediate payment from the recipient. Payment of bills is due immediately or very soon after receipt.
Purchase orders, on the other hand, are not requests for payment but rather requests for goods or services. They are the step that occurs before an invoice. The customer requests certain goods or services from a seller or vendor, the seller provides them, and then the seller sends an invoice for the goods or services provided.
Is an invoice the same as a receipt?
An invoice is also not a receipt. A receipt is proof of a payment or transaction that has already occurred. An invoice is a request for a payment that hasn’t yet occurred. A receipt is designed to give the basic information about a transaction. ‘Party A provided X to Party B in exchange for Y.’ Receipts are sent after invoices have been received, processed, and paid.
How are invoices used?
Invoices have a range of purposes, but they generally boil down to five main roles in business. Those include payment tracking, maintaining records, tax filing, legal protection, and business analytics.
#1: Payment tracking
A formal invoice sent to a client or customer is an official record of what you provided and what your customer owes. This makes invoicing the easiest way to track payments. This information is crucial during annual budget reviews and for tax filing purposes.
#2: Maintain records
Businesses need to keep records of just about everything. Invoices make key information quickly accessible by including the invoice date, the amount owed, and whether the customer has an outstanding balance or completed payment.
Having a clear and concise view of this information will make your profit and loss (P&L) statement and budget easier to manage.
#3: Easy tax filing
Businesses need to be prepared to provide their income and expenses from the previous fiscal year when they do their taxes. Paid invoices act like receipts, making filing for taxes much less complicated.
In fact, the IRS recommends keeping documents like invoices, sales receipts, and paid bills since they support the entries in your books for a minimum of 3 years. Keeping a record of each invoice date and amount allows you to complete your business tax return with little to no issue.
#4: Legal protection
Invoices are legitimate documents that can protect small businesses against missed payments for services rendered. They provide all the information you need to prove what you are owed, which can help if you need legal help to collect payments.
#5: Business analytics
Looking back on previous invoices helps businesses analyze and determine customer buying patterns and preferences, making it easier to identify the most popular products, peak buying periods, and other trends.
With this information, businesses can choose budgeting strategies that work best for them and market appropriately throughout the following year.
What is an invoice ID?
An invoice ID, also known as an invoice number, is a unique number assigned to each invoice generated by a company, business, or individual. Invoice numbers are essential for the tracking of invoices, and they allow invoices to be referenced and located easily in the future when dealing with clients and potential audits.
Some invoice IDs contain letters and numbers, and each business has its own system for numbering or identifying invoices. What matters most isn’t the specific system the business follows, but rather that it has and follows a consistent system in general. This is to avoid the mistake of giving two invoices the same ID or number, which could cause significant confusion down the road.
Whatever system a business uses to track invoices properly, the most important thing is to follow that system. Consistency in invoice labeling is absolutely essential for ensuring that allowed payments are made, tracked, and able to be referenced months or even years in the future should the need arise.
How to assign numbers to invoices
There are multiple ways that a business can assign identification to invoices. The first method is sequential, and simply involves numbering the first invoice as Invoice #1, the next as #2, and so on. Chronological invoice numbering also involves sequential numbering, but the ID begins with a reference to the date the invoice was generated. For example, an invoice may be numbered 2020-05-24-008. That invoice was generated on May 24, 2020, and its unique invoice number is 008.
Finally, invoices can be assigned unique customer IDs to help classify invoices by which customer they’re associated with— instead of a date, the ID will begin with a customer ID number.
What should an invoice look like?
Not all invoices look the same, but they nearly all feature some basic elements. An invoice should include:
- Company name and contact information
- Customer's name and contact information
- An invoice ID
- Invoice Date
- Payment terms and payment due date
- Line items of services rendered or goods received and their associated prices
- The total amount due
Free invoice templates
You can find professional invoice templates online. Small businesses can take advantage of free invoice generators to make custom invoices with your company logo as needed. Invoicing through BILL also provides the convenience of customizable invoice templates within the platform for all your AR needs.
Invoices for internal controls
Internal controls are mechanisms and processes put in place to ensure that their financial and accounting information is accurate, honest, and free from manipulation and fraud. They are a set of rules and regulations that must be followed by both accounting and finance divisions and the company at large. Besides helping avoid fraud or manipulation, internal controls are also designed to improve operational efficiency and make financial reporting more accurate, efficient, and beneficial to the company.
Invoices are an essential tool when it comes to internal controls. They ensure that all charges are approved by responsible parties, and that there’s a clear paper trail between invoice payments and where they originated.
How to better manage invoices
Businesses may experience many pain points in traditional invoicing. For example, paper invoices are delivered through postal mail or pdf invoices are sent through email, and managed manually through Microsoft Excel. However, pdf and paper invoices are time-consuming to produce, human-error prone, and difficult to manage, especially at scale. Unlike electronic invoices through an automation solution, it’s difficult for your staff to track when each paper invoice was sent and when, or if, it was paid. BILL’s AR/AP automation solutions help to recognize potential errors such as duplicate bills, overpayments or late payments and keep you informed. With invoice automation, you can also take advantage of setting up invoice timing and payment reminders to better manage cash flow. Scheduling recurring invoices is also easy to do. Try a BILL risk-free trial today!
Payment terms
Another critical detail will be your payment terms. Payment terms might include deposit required, discounts, tax rates, late fees, and your customers’ ways to pay—for example, if you accept partial payments. Typical payment terms include:
- Net10 — ayment is due 10 days after the date of invoice
- Net 30 — payment is due 30 days after the date of invoice
- Due upon receipt — payment is expected immediately once the invoice is received
Standard terms are net 30, 2/10 net 30, end of the month (EOM), 15 MFI, or upon receipt. Net 30 means the customer has 30 calendar days to pay, while EOM means they have until the end of the month. Meanwhile, “15 MFI” is a term stipulating that payment is due on the 15th of the month following the invoice date.
Some businesses may offer discounts like 2/10 net 30, which means that the customer will receive a 2% discount if they pay within 10 days instead of 30 days.
These terms can extend as long as net 45 days, net 60 days, or net 90 days out.
FAQs
Does an invoice mean you’ve been paid?
An invoice doesn’t not mean you’ve been paid yet. A receipt would confirm payment, where an invoice is essentially a request for payment for products or services rendered.
What is an online invoice?
An online invoice is simply an invoice in a digital format. Online invoicing often allows customers/clients to view invoices and possible payment methods (i.e., bank transfers, ACH, credit card, debit card, and more) as well as to make the payments online.
What should you not put on an invoice?
You should first ensure you’ve met the legal requirements for an invoice, and ensure the details are clear and concise on the invoice. Don’t include vague or unclear product or service descriptions, spelling or math errors, or incorrect contact info for yourself or the other party.
