Documentation is critical in businesses. Each transaction will typically involve different documents that serve distinct purposes. An invoice is one of the documents that you should always plan to use as a business owner. An invoice requests payment for goods delivered or services rendered to a buyer.
A template highlights all the information that must be documented to record each transaction accurately in the invoice. As a result, it is essential for tracking a business’s accounts receivable. It also serves as a legal record for future reference should disputes over a particular transaction arise.
This article will give business owners a good idea of what needs to be included in an invoice template, how to use it effectively, and different invoices. The article will also provide you with tips on how to make your invoices more efficient.
What is an Invoice?
An invoice is a formal written payment request issued by the seller to a customer.
The document itemizes the goods sold or services rendered and outlines payment terms, such as unit price, the total amount owed, due date, late fees, available payment methods, etc. An invoice marks the first step in collecting payment. The document first tracks payment as it enforces the customer to pay. Secondly, it is a notification of debt owed by the associated due date. The document is as important to a seller as it is to a buyer. If well created, it serves as a legal record of the transaction.
Do you know? The word invoice originated from the French word “envoi” in the 16th century, which means “dispatch or send goods.” Similarly, it can be interlinked with the English word “envoy,” which means “messenger.”
What is an Invoice Template?
An invoice template is a pre-designed document that helps you to create a professional invoice. Our readers can download free invoice templates from our site. The templates are easy to customize and reusable, saving the user from creating invoices from scratch.
The invoice template provides all the necessary elements in the correct order to make it easy to complete. It eliminates confusion over what must be included in each document and prevents incomplete or inaccurate invoices. With a standardized format, a template allows the seller to focus on itemizing the sale details rather than selecting and designing the invoice format. This way, as a seller, you can generate invoices faster and get paid on time.
Reasons for Using Invoices
Invoicing is necessary for all businesses for accurate records of their transactions and proper accounting. So, if poorly executed, it can lead to delays in payment and, consequently, cash flow problems, which leads to accounting problems. This can also lead to a myriad of issues down the line.
Provided below are reasons why using an invoice is necessary for business:
While an invoice does not imply that the buyer is legally obligated to pay for goods or services offered, it can be used as evidence of a business transaction between you and the buyer. In addition, this protects the business from fraudulent cases where the buyer refuses to pay.
Invoicing is an excellent way to know whether clients’ accounts have been paid. Invoicing provides a reliable record of what goods/services were purchased, any partial payments made, and which payments are due. This ensures payments do not go past their due date and helps avoid other follow-up approaches such as emailing, direct phone calls, and mailing clients to clear their debts.
By issuing invoices, you create a clear paper trail of business transactions that can be used for the short and long term. This is because they contain important details of each transaction. For example, an invoice can record which goods were sold, the customer’s details, the date of sale, and payment terms. This information is significant for auditing. This is because the document serves as a reminder of all the transactions done within a particular period. This also prevents any losses and potential losses due to unpaid bills.
The invoice is a great way to analyse your sales and formulate feasible marketing strategies. This is because it contains accurate data that can be used to derive conclusions regarding different aspects of your business. For example, this information can analyse which products are selling well, customers’ buying patterns, and trends, what payment terms are most favourable, and how payments are made.
Easy tax filing
Every business owner will have to file taxes at the end of the year. This can be a tedious process that requires the accuracy and retention of different accounting documents, such as invoices, for months or even years. Advantages of using an invoice include having an accurate and itemized list of products sold and income generated at the end of the year. This information is necessary for filing the proper returns.
Evolution of Invoices
Invoices have been around for a very long time. However, the original invoices were primitive compared to the current version of invoices. This is because as technology evolved and businesses grew, they needed a better way to monitor their accounts by using invoices.
Here is a history of the evolution of invoicing:
The first invoices were made from stone or clay tablets and were estimated to be used as far back as 5000 BC. This form of invoicing was recorded in Mesopotamia. Merchants used stone or clay tablets to document their transactions. Information was engraved on the tablets, and basic math was used to calculate payments.
The next generation of invoices was made from animal skin, parchment, or paper. These invoices were more detailed than stone invoices and contained most of the elements on modern invoices. They also introduced signatures and seals for additional authentication.
With the invention of computers, businesses could automate tedious tasks such as calculating payments and printing invoices. Hand-written invoices were quickly being replaced by printed invoices made using machines. Electronic invoicing was considered cheaper, simpler, faster, and less laborious than traditional invoicing.
After the internet introduction, a new, more advanced, remote means of interacting with customers was developed. As a result, this led to a less paper-based society where most transactions are done online. For example, invoices were sent via email, and customers made payments online. As a result, invoicing became faster and more convenient for sellers and buyers.
Today, most businesses use mobile invoicing. Again, this was a result of the advancement of communication technology. Businesses use Software as a Service (SaaS) platforms to issue invoices and receive payments. Mobile invoicing is instant, secure, automated, and thus more convenient than previous generations of invoicing.
Types of Invoices
There are different types of invoices. They are all meant for different business transactions, but most invoices follow the same basic format regardless of the type.
Some of the more common types of invoices and their purposes are discussed below:
Pro forma invoice
A pro forma is issued before work is completed or goods are delivered. Such an invoice is used to generate sales rather than confirm money owed by the buyer. Instead, it serves as a quotation where the seller commits to offer their services or goods at the stated price.
This invoice is meant more as a quote than an actual request for payment. It indicates the estimated price of goods or services and not the final price. So, this should be communicated to the customer. Proposals will typically be used for large projects.
A commercial invoice is used when selling goods that have to be shipped across international borders. It is used for customs declaration. In addition, it is used to request payment, indicate the value of goods supplied, and all other fees incurred by the seller.
Such an invoice is issued once the payment due date has elapsed. Since most payments will have a due date of 30, 60, or 90 days, a past-due invoice will be issued after the respective time frame. This invoice should not be confused with an outstanding invoice issued when payment has not been made and the due date has not passed.
In some cases, you may have to award the customer a discount or a refund, maybe due to invoicing errors or goods that have been returned due to defects. In such cases, a credit invoice is issued detailing how much the customer will be reimbursed or the discount awarded. The amount on a credit invoice is a negative number – for example, if a refund of $100 is given, the amount on the document will be -$100. This invoice is, in some instances, referred to as a credit note or memo.
A debit invoice is contrary to a credit invoice. It is issued to collect additional payments from a client. This can be in cases where the payment was incorrectly invoiced, or the customer paid less than the goods valued.
Such an invoice collects payment for work billed based on hours. For example, timesheet invoices include information regarding hours of work and the workers’ salaries or wages for that period. Such an invoice can be suitable for consultancy or service-based work.
An interim invoice is issued during a project to request periodic payments. This is issued based on what has been completed so far. The invoice can be issued weekly, monthly, quarterly, or any other interval basis. The amount requested should be based on the initially agreed cost of the project. Therefore the total amount collected through the interim invoices should not exceed the total estimated cost of the project. This invoice is also known as a progress invoice or progress bill.
Sometimes customers can make advance payments, such as subtracting a deposit from the total cost of goods or services. In such cases, you should send them a retainer invoice showing the advance payment and the balance. The balance ought to be paid after goods or services have been delivered.
Recurring invoices track and collect payment for ongoing or repeating transactions. As a result, they are sent at regular intervals. An example of such an invoice is a subscription invoice used to track the payment for goods or services purchased under a subscription agreement.
A final invoice is sent at the end of a project. The details on this invoice usually include work that has been completed, hours billed, additional costs incurred, etc. It also includes any discount given, shipment quotes, and the final payment’s due date, where applicable. If interim invoices were issued, they should be declared in a final invoice.
An invoice is a detailed record of a business transaction sent to a buyer as a formal request for payment. It has similarities or consistent information with other business-related documents such as receipts and bills. It can thus be easily confused with such documents. Here are examples of documents that are commonly associated with an invoice.
As much as a bill serves the same purpose as an invoice to collect a payment, there are specific fundamental differences between them. Firstly, a bill generally does not contain all the details that go into an invoice, for example, the customer’s information. This is because a bill is more generic. Also, a bill is typically to seek immediate payment, for example, a bill for lunch at a restaurant.
Business owners or sellers mainly send a receipt as proof of payment that a client has made for services or goods offered. It is an acknowledgment of payment that indicates how much money was received by the seller. Also, to a customer, it can be proof of goods ownership.
The seller or business issues a purchase order to the buyer or purchaser of goods or services. It will typically contain details such as the name and address of the seller, quantity, and type of product/services the buyer intends to buy, along with any additional information that may be deemed necessary.
Assigning an Invoice Number
An invoice number is used to identify and track an invoice and distinguish it from other invoices. This number can be in different formats based on how you prefer to file your records.
You can assign invoice numbers as follows:
Sequential order is the easiest method to file invoices. It is also the most popular numbering format for most invoice software. It involves assigning the first invoice a number, typically 1, and the subsequent invoices are assigned the following number in the sequence. The invoice number can take different formats, such as 001, 0001, etc.
The chronological method allows you to file the invoices by date in chronological order. You can use different formats for your invoice numbers, such as YYYYMMDD or YYYY/MM/DD. In addition, the date can be followed by other identifiers such as numbers, for example, 2022-10-13-001.
By customer ID
This method includes assigning each customer a unique customer ID, for example, 888, AD53, etc. Then, assign the invoice number based on the customer ID each time you close an account with that customer. In addition, the invoice number can be followed by an additional identifier, such as AD53-001.
By project ID
This is similar to the customer ID method but based on project IDs instead of customer IDs. In this method, each project will be assigned a unique ID, and each invoice number will be related to that specific project. The invoice number comprises two parts; the first contains the project ID, while the second comprises a sequential number that distinguishes the invoices issued throughout the project. This numbering method is popular in the construction industry.
What to Include in an Invoice?
An invoice should be well-detailed to identify the parties involved in the transaction, which goods were being traded and information regarding payments.
Here are the items you should look for when choosing a template to create an invoice:
This is one of the essential details that must be visible in an invoice. It is the primary identifier of every invoice, known as its reference code. Every invoice has a unique number which allows you to track and identify each transaction.
Date of service rendered
The invoice should include the transaction date and when the service or goods were delivered. This can be in different formats, such as YYYYMMDD or MMDDYY. Dates are essential for record-keeping.
Date of sending the invoice
For filing and tracking purposes, a section for the date when the invoice was issued should appear on an invoice template. This can be formatted as YYYY-MM-DD or DDMMYY as suitable.
Contact and name of the seller
The seller ought to be identified in the invoice. This is to avoid confusion as to who sent the invoice. Remember, a buyer could be dealing with multiple vendors simultaneously. The seller’s contact details should be included, too, to make it easy for the buyer to get in touch with the seller should they have any questions.
Name and contact of buyer
The invoice should include the customer’s name and contact information (phone number, address, email). The customer’s information should correspond with the billing information on your accounting system to avoid confusion or errors in other invoices.
Terms and conditions
Next, the invoice should outline the applicable terms and conditions of sale. This includes applicable due dates, the company’s non-payment rules, partial payment plans, or another noteworthy policy, such as a refund policy.
A line detailing each product or service
Each sold item should be written in a separate line. Then, each good should be described briefly but precisely. You can include details such as type, model, specification, brand, etc.
Cost per unit of product
The cost per unit of each product should be stated. In addition, the quantity of each product and the corresponding price should also be specified. Each product should thus have a unit price and a total cost.
Sales tax is typically applicable to most products. The specific tax on the products sold to the buyer should be indicated. Each product will ordinarily have different tax rates. So, be sure to calculate the total of all products.
The total amount owed with currency
The invoice should include the total amount that is due. The currency used to represent the amount owed can be either dollars or any local currency (as applicable). This amount will include the cost of products, sales tax, and any discounts offered.
A personalized note
A personalized note can be included in the invoice. It can address things like appreciating customers and encouraging them to shop with you again. This is a good way of increasing customer-seller engagement.
Late fees warning
It is important to highlight to the customer the maximum amount they can be charged if they are late paying their invoice. Also, you should clarify if the late fees will be at a fixed amount or percentage of the money owed.
Important: To make an invoice legally admissible, it must contain the name of the seller and the buyer and must be signed, as do all legal documents. A signature is vital as it verifies that both parties understood the stipulations of the invoice and agreed to uphold them.
Online Invoicing Vs. Paper Invoicing
To own a successful business, you must have a well-documented invoicing system. An invoice can be sent online or on a piece of paper. Online invoicing is the issuance of electronic or digital invoices via email or applications.
The advantage of online invoicing is that it is more convenient and quicker; sending an invoice online can take just a few minutes, whereas traditional methods, such as printing and mailing via the post office, may take days or even weeks to be delivered. Online invoicing is thus superior in terms as it leads to faster payments. Again, this is because invoices can be delivered more quickly. Also, payments through credit or debit cards are faster than check payments.
Another advantage of online invoicing is that it leads to faster payments; thus, your business can have improved cash flows. This, in turn, leads to smooth operations.
Also, with online invoicing, the invoice is digitally generated, and systems that are well-integrated with your accounting software will allow you to track its status from creation to delivery more efficiently than paper invoicing.
Online invoicing is considerably more affordable than paper invoicing. This is because it eliminates the costs of printing paper, postage stamps, and other additional costs. This can be primarily for businesses that send multiple invoices.
To have a hassle-free invoice-issuing process, you need to bear in mind the following points. These include:
Send invoices quickly
Speed up your invoicing process. If your system allows you to create an invoice immediately and send it in a few minutes, then do so. This also encourages your customers to make payments on time.
Use online invoicing
Use software to help you create invoices. Online invoicing is more efficient and makes it easy for clients to access invoices in their inboxes. If you do not have one, use the free or trial versions of different software to find one that meets your needs.
Send the invoice to the right people
Always verify who will release payments for the goods or services sold to your client. Then, send the invoice to the right party. Check if the email address and name are correct before sending your invoice.
Have an organizational system
You should have a central place to track and manage your invoices. An organized system can help you properly store your invoices for accounting, tax filing, and bookkeeping purposes.
Set clear payment terms
Clarify any applicable payment terms. For example, if late fees are applicable, let your clients know. Also, ensure that the chosen payment method is accepted by your customer or available for them to use. Finally, ensure all information on the invoice is clear, concise, and easy to understand to avoid disputes over misinterpretations.
Frequently Asked Questions
How do you create an invoice?
The two most common ways of creating an invoice are using an invoice template or invoicing software. Regardless of the option, always verify that the invoice contains all the necessary information regarding the seller, buyer, product description, due date, the amount owed, and payment terms.
How do you send an invoice?
If you are using an online invoice system, it will automatically send the invoice to the customer’s email address. However, you may have to send the invoice yourself if you use templates. So, ask for the customer’s email address beforehand.
How do you manage invoices?
Managing invoices is easy when you are using an online system. All you are required to do is check the status of your invoice, that is, if it is fully paid, partially paid, or pending. This can be done through your mobile device or desktop, making it convenient. Alternatively, keep a record of which invoices have been sent, cleared, and pending if you are sending a paper invoice. However, online invoicing remains to be the most convenient in business currently.
How do you choose the best invoice system?
There are several essential factors to consider when selecting an invoicing system. So, you must decide on the essential features for you or your business. However, a simple and easy-to-use system that allows you to send and track invoices easily will always be the best.