Invoices have 3 main purposes: they help you file taxes accurately, they grant additional legal protection in case of a dispute and they give you the necessary insight to make smart future investments.
September 27, 2022 
● An invoice is a legally binding document that details the sale of products or services by a seller to a buyer. Apart from being a record of sale, invoices are used to request payment from a customer.
● There are many different kinds of invoices – from standard sales invoices to interim invoices for ongoing projects and commercial invoices for international trade. The type of invoice you need to write will depend on your industry, your services and the kind of payment you’re requesting.
● Invoices have 3 main purposes: they help you file taxes accurately, they grant additional legal protection in case of a dispute and they give you the necessary insight to make smart future investments.
● To write an effective invoice, you need to follow these steps: create a professional-looking layout, include a detailed breakdown of your costs and ensure that you added all the relevant information.
“What is an invoice and how do I write one?”. If you’re a new business owner, it’s quite likely that you’ve asked yourself that question. For the uninitiated, an invoice is a time-stamped document that a seller gives to a buyer in order to collect payment.
The main purpose of an invoice is twofold. Firstly, an invoice serves as a means of recording the sale and purchase of products or services. It is a legally binding document between you and your customer that allows you to keep a record of your sales. Thanks to an invoice, you can easily know when you sold a product or service – as well as find out who you sold it to.
Secondly, invoices are also a way of requesting payment from a customer. This helps companies know whether their customers are paying their invoices on time and in full. It also allows them to chase their customers for payment once their invoices have become past due.
Although the main gist of invoices is fairly simple, the truth is that there is a lot more to them than meets the eye. For example, did you know that there are many different types of invoices?
Businesses can create a wide range of different invoices for their clients. Basically, the kind of invoice that you’ll send will always depend on three things: the industry you work in, the kind of services that you sell, and how often you’d like to get paid. With this in mind, we’ve put together the following list detailing the main invoice types:
Also known as standard or regular invoice, this is the most popular kind of invoice. Sales invoices often follow a common format. They include the seller’s and the buyer’s names, locations and contact details, as well as a short description of the purchased product or service.
Most importantly, standard invoices also include the price of the purchased goods or services, the seller’s payment details, and an invoice due date. The seller should also ensure that they include an invoice reference number. This will allow them to easily track the invoice in case of any future queries.
A proforma invoice is an estimated invoice sent to the buyer in advance of the delivery of the products or services. In a few words, a proforma invoice is a provisional or a draft invoice that lets your customer know how much your services or goods will cost them. Unlike standard invoices, proforma invoices should not have an invoice number.
There are many more significant differences between proforma invoices and standard invoices, such as:
-A proforma invoice is not a legally binding document.
-The buyer should not make payment on a proforma invoice. Instead, they should wait for the full invoice to arrive.
-The amount of money stated on a proforma invoice is liable to change and should never be included in your accounting books.
Although they’re not legally binding documents, proforma invoices still play a huge role in the sales process. They are effectively a negotiation tool that allows both involved parties to agree on a price before payment is requested.
This is one of the most popular invoicing types for companies with a long-standing business relationship with one of their clients. Basically, a recurring invoice is an invoice that is repeatedly sent to the same customer on an ongoing basis – weekly, monthly or yearly. There is no change whatsoever to the products, services and prices.
Monthly contracts or subscription-based services – such as a streaming platform subscription – are good examples of recurring invoices.
One of the most common types of invoicing in SaaS industries, consolidated invoices allow sellers to bill a customer for multiple goods or services at the same time. For instance, let’s say that you’re billing a customer for designing their website and running a PPC campaign for them. As these are different services with different rates, you’ll have to send your customer a consolidated invoice grouping both charges.
Also known as a credit note, a credit invoice is sent when you need to credit money back to your customer. Say, for instance, that you have mistakenly overcharged your customer. By sending a credit invoice, you’ll correct your previous sales invoice and return the overcharged funds to your customer. One of the most common types of invoicing, credit notes are also used for refunds and customer returns.
A debit invoice is basically the complete opposite of a credit invoice. If you have undercharged your customer by mistake or ended up working more hours than initially agreed, you’ll need to send them a debit invoice to reflect these additional charges. It differs from the standard sales invoice in that debit invoices are issued to reflect an adjustment, not a purchase.
There are times when you’ll have to make adjustments to your invoices that reflect both an overcharge and an undercharge. There are two ways you can go about this. You can send a credit note and a debit invoice to reflect both adjustments separately, or you can issue a mixed invoice that shows the aggregate as the total amount owed.
This is one of the most essential types of invoicing in international trade. The term “commercial invoice” refers to an invoice used when a service or a product is sold by a seller based outside the buyer’s international borders. It is also important to note that this doesn’t include shipments made between EU countries.
Apart from providing all the usual details about the transaction of goods or services, a commercial invoice is also a customs document. Therefore, it needs to be presented by the buyer to their country’s export customs office. This is why commercial invoices must include both the importer’s and the exporter’s tax details.
An interim invoice is used for long-term projects that will potentially take several months to complete. One of the most common invoicing types in digital marketing industries, interim invoices allow companies to break down the payment of big-scale projects in order to maintain a healthy cash-flow injection. But interim invoices not only help sellers – they’re also extremely convenient to the buyers, as they don’t have to pay for an entire project in one go.
These are invoices that haven’t been paid after their “past due” date. A seller is often entitled to claim interest on past due invoices, as the lack of payment has a direct negative effect on their cash flow. If an invoice has been issued without a “pay by” date, refer to local laws to learn when it will become past overdue. In the UK, this is 30 days after an invoice has been received.
Now that we’ve gone through all the most important invoicing types, let’s see what their purposes are.
Invoices are first and foremost the main evidence that a sale transaction has taken place. But that is far from being their only purpose. While there’s little to no doubt that the main purpose of an invoice is to be a record of sale for both the customer and the client, invoices can actually serve a wide array of different functions. In fact, there are many aspects of running a business that would be rendered impossible without invoices.
These are the main benefits of invoices:
One of the most painstaking parts of running a business is ensuring that you’re doing your taxes correctly. Fortunately, tax filing is made a lot simpler once you learn how to invoice. Issuing and recording invoices regularly will allow you to report your benefits and expenses accurately – meaning you’ll always pay the right amount of taxes.
Invoicing becomes particularly useful when paired with an Accounts Receivable (AR) software solution that seamlessly collects all your payments and gives you detailed breakdowns of your accounts. Apart from making sure that your taxes are filed correctly, having an automated AR solution in place will also massively simplify your tax processes.
If you own a business, chances are that you will eventually be involved in a dispute regarding the cost of your products or services. Unfortunately, this dispute might even escalate into a legal procedure. If this happens, the most effective way of covering your back is to go through all your past invoices.
Because invoices are legally binding documents, they serve as legal proof that you and your customer have agreed on a set price for a certain number of products or services.
Having access to in-depth sales and finance analytics can represent a crucial advantage for any business. Without a doubt, the best way of gathering key information about your customers and products is by tracking it with your invoices.
Again, this is where automated AR software can really make a difference. On top of ensuring that you have no outstanding invoices, an automated reporting tool for your accounts will offer you valuable data analytics that will give you all the necessary insight to make smart decisions about future investments. For example, you’ll be able to track seasonal trends and discern which products offer the highest ROI.
Now that we’ve clarified the purposes of invoices, let’s see how to write an invoice.
Whether you’re a business owner or a freelancer, knowing how to write an invoice is one of the most important skills that any business owner can have. Writing a good invoice is not just about making sure that you’re getting paid. It’s also about building trust with your customers by ensuring that your business doesn’t look unprofessional.
With this in mind, we’ve put together a short guide on how to write an invoice in 3 simple steps.
Whether we like it or not, first impressions matter. And that is precisely why your invoices should be indicative of what your business stands for. So when you’re writing your first invoice, your initial step should always be to create a professional-looking layout. Your invoice layout should be, first and foremost, concise – so that your customer can review all the information in it with a quick glance.
If you have a company logo, include it at the top of the page alongside your business name. This will make your invoices more memorable – in turn, increasing the chances of them being paid on time.
It is of paramount importance that you ensure that your invoices always include a detailed breakdown of the charges. List each product or service you’ve sold individually, and make sure that you write both the gross total of the charges and the net total. Apart from making your invoices look more professional, this will help you avoid any potential queries or disputes.
To help you double-check that your invoice includes all the essential information it needs to convey, we’ve put together the following checklist. These are the details that an invoice should always include:
-The term “invoice”
-A unique invoice number
-Buyer’s and seller’s name and address
-Date of issue
-“Pay by” date
-Products/services provided
-Cost of the products/services
-Tax information (such as VAT)
-Payment terms and instructions
Now that you know how to make your own invoices, remember – if you want to keep an accurate record of your outstanding invoices, all you need to do is invest in a smart credit control platform. Apart from taking the stress out of invoice collection, a credit control platform such as Kolleno will equip you with a wide range of tools to modernise your accounts processes – from automated collection solutions to an arsenal of insightful analytics tools.
An invoice differs from a receipt in one key point. Whereas an invoice is a request for payment, a receipt is the proof of such payment. Businesses give receipts to their customers after they make the purchase, not before.
While the terms “invoice” and “bill” are sometimes interchangeable, they’re not synonyms. A bill is a document stating the money owed by a customer, meaning that it’s less formal than an invoice. Unlike a bill, an invoice must also include the buyer’s and seller’s address and contact details.
When accompanied by a contract, an invoice is a legally binding document that details the terms of a transaction between a buyer and a seller. Apart from a list of the sold goods or services and their price, an invoice should include a date of issue, the name and address of both buyer and seller, and a “pay by” date.
https://www.zoho.com/invoice/guides/15-types-of-invoices-for-businesses.html
https://sumup.co.uk/invoices/invoicing-essentials/what-is-a-proforma-invoice/
https://cleartax.in/s/standard-invoice-formats
https://www.billtrust.com/resources/blog/what-is-an-invoice/#h-what-is-the-purpose-of-an-invoice
https://www.investopedia.com/terms/i/invoice.asp
https://sumup.co.uk/business-guide/what-is-an-invoice/
https://planergy.com/blog/proforma-invoice-vs-invoice/
