Beginner’s Guide to Understanding Invoices

Dimitri Raziev27 Oct 202213 mins
Beginner’s Guide to Understanding Invoices

Key Points

Invoicing is an essential component of practically any business as it substantially impacts a company’s audits and internal accounting measures. 

An invoice is a document detailing a transaction that has taken place between a seller and a buyer, with notable examples of such being an online statement issued by an e-tailer or a paper-based receipt provided by an offline store.

Invoices typically document the seller’s payment terms, price per unit item, and shipping expenses, together with any other terms and conditions that are relevant to the transactions.

All companies ought to consider employing cloud-based invoicing software to elevate their invoice management capabilities.

Although the concept of invoice management may appear relatively straightforward on paper, there are various facets that business owners and the company’s finance department will need to take into consideration. In particular, all invoices must be descriptive, accurate, and generated in a punctual manner to ensure a steady operational cash flow for the company.

To assist companies in doing so, Kolleno is a smart credit control platform offering practical accounts receivable software to strengthen a business’s ability to manage its invoices effectively. With that, if you are a credit controller seeking to improve your invoice management process substantially, contact Kolleno to arrange for a detailed product demo.

What Is an Invoice?

An invoice is a time-stamped commercial document and maintains detailed records of a transaction between two parties, namely a buyer and a seller. Should the company’s product and/or service be purchased on credit, the invoice would typically include the specific terms and conditions of the deal as well as the relevant information regarding how customers could pay for the purchases at a later date.

Meanwhile, invoices come in a wide variety of forms, such as but not limited to a sales invoice, a paper receipt, a debit note, a bill of sale, or an electronic record issued by an online retailer. Other than that, an invoice may be termed differently based on the receiving party. For instance, an invoice would be known as a “purchase invoice” for customers, whereas an invoice would be classified as a “sales invoice” for sellers or suppliers.

What is the Difference Between an Invoice and a Quote?

Put simply, invoices vary from quotes because an invoice showcases the specific time token alongside the actual costs associated with a specific transaction. On the other hand, a quote only documents estimated expenses to execute a particular business activity, which is subject to change depending on the circumstances.

Not to mention, a quote is usually limited to a specific time frame, such as 30 days from the day it was issued by the seller or supplier, as the costs incurred may fluctuate in the future.

What is the Difference Between an Invoice, a Bill, and a Receipt?

In general, invoices and receipts convey the same information about a particular business transaction. However, an invoice is created by the company that has sold its product and/or service. On the contrary, the buyer receiving the invoice would be recording that piece of document as a bill to be settled. Once the bill has been paid, the business would, in turn, issue a receipt to be recorded as official evidence of the customer’s payment.

The Evolution of Invoices

Fascinatingly, records of commercial transactions date back to as early as 5,000 BC in Mesopotamia. As a result, it comes as no surprise that the format of invoices has come a long way and has evolved substantially, beginning with:

Stone Invoices

To begin with, sellers in the early days used to carve out the transaction details on stone tablets or clay whilst utilising the earliest version of mathematics.

Hand-Written Invoices

Following that, invoice documents were usually generated via merchants writing the transaction details by hand on paper, parchment, or even animal skin. During these times, sellers began to include components found in the majority of current invoices, such as seals and/or signatures.

Electronic Invoices

The invention of computers eventually revolutionised the invoice management scene, with much of this change driven by an intense desire amongst companies to lower the high operational expenses associated with salaries and wages. Consequently, the invoicing process became significantly more straightforward, efficient, and cheaper as electronic invoices became increasingly common.

Online Invoices

Nonetheless, innovation did not end there, as the emergence of the internet permitted a much more secure and practical approach to communicating with customers. Moreover, the introduction of online invoices that are essentially paperless as they are delivered to clients via email took the world by storm.

Mobile Invoice

Fast forwarding to our world today, the invoice management process has gone mobile as the development of mobile applications that can automate the invoicing process by specialised software-as-a-service (SaaS) corporations now permits business owners to create invoices almost instantly and in a secure manner.

The Basic Elements of an Invoice and Best Practices

Put simply, a proper and legally-sound invoice document ought to include all the crucial information that customers need in order to complete their transactions smoothly. Meanwhile, a good invoice should also provide an official avenue to clarify any frequently asked questions regarding making payments.

On that note, an invoice, in the majority of cases, will document a list of the following components:

-The term “invoice”

-An invoice number that is unique to this document for both the buyer’s and seller’s reference

-A brief description of the delivered product and/or service

-The price per unit of the product and/or service provided

-The total number of units purchased by the customer

-The seller’s (i.e., the company) name and contact details

-The buyer’s name and contact details

-The date and time the product and/or service was provided

-The date and time the invoice was delivered to the customer

-The total amount to be paid by the customer

The specific payment terms, which usually detail the company’s preferred payment method, the due date for the buyer to complete the transaction, terms and conditions relating to late payment penalties, as well as the details regarding early payment benefits

In essence, structuring an invoice document may have substantial implications on a business’s ability to settle its accounts receivables from its customers. For instance, invoices should explicitly specify the credit period instead of mentioning relatively vague terms on the payment due date. Meanwhile, all non-essential data that may cause unnecessary confusion amongst customers, such as internal company jargon, are strongly recommended to be excluded from the invoice. Besides that, a widespread best practice amongst corporations is to place the company’s contact details in a text box so readers can quickly notice it (i.e., the customers).

How to Assign Invoice Numbers

There are a variety of methods by which companies can assign unique invoice numbers to each invoice document, with some of the popular approaches including the following:

Sequential Order

To provide some context, businesses would usually begin with any number (typically the number “1”) and assign future invoices with the following number in the sequence (e.g., Invoice #001, Invoice #002, Invoice #003, etc.).

Fundamentally, sequentially assigning invoice numbers is the most straightforward method adopted by businesses as this strategy makes it really convenient for businesses to remain consistent as well as prevent the accidental duplication of invoice identities. As a matter of fact, this method is often the default style employed by the majority of cloud-based invoicing software solutions.

Chronological Order

Businesses managing their invoices chronologically would usually sort all invoices based on the data they were created. Thus, the initial series of numbers in each unique invoice number would typically refer to the date the invoice was generated. Following that, the invoice number would be assigned a combination of numbers that are exclusive to each invoice document. 

Based On a Specific Project ID

A file organisation method standard in the construction industry, companies engaged in multiple projects at any point in time with a particular customer, could consider billing them on a project basis. Therefore, assigning invoice numbers based on each project ID is another approach businesses could consider. 

Based On a Particular Customer’s ID

The procedure for allocating invoice numbers by the respective customers’ ID is somewhat equivalent to the invoice number assignment process via chronological ordering. In most cases, the unique invoice number would first begin with the customer’s ID, followed by a unique number combination.

When and How Should Businesses Invoice Their Clients?

Generating an invoice document before delivering the products and/or services is a pragmatic practice when businesses manage smaller orders. This strategy usually creates sufficient pressure for companies to ensure the proper delivery of their goods and service whilst reducing the probability of encountering late payments. Not to mention, businesses obtaining upfront payments could have a healthier cash flow, which is crucial, particularly amongst micro-, small-, and medium-sized enterprises (MSMEs).

On the other hand, creating the invoice for customers after delivering the products and/or service typically requires a high degree of trust as it is much riskier. In the worst-case scenario, settling late payments could cost companies expensive legal and/or debt collection agency fees. Thus, it is increasingly common for businesses to structure invoices that involve getting customers to pay 50% of the total amount owed upfront and the remaining upon the delivery of the company’s offerings. Should this matter involve large-scale projects, corporations could consider segmenting the payment into various tranches that are either time-based or milestone-based, depending on the client’s preference.

What Are Invoices Used For?

In essence, invoices are legally binding agreements between companies and their customers that explicitly showcases both parties’ consent to the quoted total amount owed by the buyer as well as the terms and conditions for settling the payment. With that, invoice documents are a mandatory piece of evidence that businesses need to keep a record of if they intend to demand payments.

Other than that, additional benefits associated with the proper generation and management of invoices among corporations would include their increased ability to maintain a legal record of their sale transactions. As a result, this streamlines the process for businesses to determine the details regarding when a product or service was delivered, the details of its buyer, and the person responsible for that transaction.

Meanwhile, invoices are valuable documents for accounting purposes because they help companies and customers track their payments and amounts due effectively. Moreover, a legally sound invoice helps companies protect themselves from fraudulent lawsuits from legal loopholes within the fine print. Plus, having a proper recording and tracking of every invoice document will assist companies in the accurate reporting of their income and tax payment amounts. 

Last but not least, invoices are an excellent source of information for companies to identify notable trends within their customers’ purchasing behaviour. Examples of such data points may include popular product categories, peak buying seasons, the highest revenue-contributing buyers, and many more. Consequently, invoice documents could empower businesses to develop much more productive marketing strategies in the future.

The Different Types of Invoices in Businesses

Similar to invoice numbers, invoices can come in numerous forms, depending on the specific scenario generated. With that, such invoice variants include:

Pro Forma Invoice

To put it simply, a pro forma invoice is a document that details the seller’s commitment to delivering the relevant products and/or services to the customer for a price agreed upon by both parties. It is essentially a preliminary bill that is delivered to the buyer before the company provides the goods and/or services. Such invoice formats usually come into the picture when the business manages international transactions, particularly those involving customs purposes on imported goods.

Commercial Invoice

In the meantime, commercial invoices are documents utilised during customs declarations, which involve exporting goods sold across international waters.

Credit Note

A credit is fundamentally an invoice document sent to the customer if the products have to be returned to the company due to mistakes or damages.

Timesheet Invoice

A timesheet invoice is usually delivered to a buyer when a company intends to charge them for the services provided on an hourly basis.

Retainer Invoice

A retainer invoice is often shared with the customer if they intend to make an early payment for a good and/or service, whereby this amount will then be deducted from the buyer’s final payment upon the delivery of the product and/or service.

Recurring Invoice

In contrast, recurring invoices are generated and sent to customers at consistent intervals to manage repeating transactions, which is commonplace for companies operating via a subscription-based business model.

With that, Kolleno offers an all-in-one accounts receivable software to elevate a business’ productivity because its automated solution eliminates the need for employees to perform manual accounting tasks.

Important Tips and Advice When Drafting Your Invoice

In general, there are a number of the conventional wisdom surrounding how business owners could make the best use of their invoice management process and make sure that they are adequately compensated for the products and/or services provided to their customers.

Examples of such tips include:

-Rewarding customers for early and/or punctual invoice payments

-Ensuring that the customer journey during the invoice payment process is as smooth as possible

-Establish a recurring invoice management system if such an approach is applicable

-Automate the invoice management process

-Negotiate upfront payment terms with the customer

-Build a positive and long-lasting relationship with customers to sustain loyalty

-Pause or discontinue projects if a customer refuses to comply with the agreed-upon payment schedule

The Perks of Employing Modern Invoicing Software

Modern invoice management software offered by software-as-a-service (SaaS) companies are frequently practical solutions to help businesses automate their entire invoicing process so that the company can receive their payments on time. 

In particular, invoicing software enables businesses to:

-Generate customised invoices

-Automate any recurring and tedious manual tasks within the invoicing process

-Collect payments securely on a recurring basis

-Help customers track their purchase histories and/or settle payments online

On that note, it is clear that invoicing software can help to streamline a firm’s financial and accounting procedures. As a result, companies may:

-Significantly lower operational costs associated with salaries and wages for employees working within the billing and invoicing departments

-Strengthen their operational cash flow via the accelerated payment of invoices

-Reduce the frequency of payment fraud

-Automate the follow-up communications with late-paying customers

-Elevate their relationship with customers via a much more efficient customer service system

Concluding Thoughts

In a nutshell, a proper invoice should not be viewed solely as a sales receipt but rather as a legitimate legal document that can protect companies from errors or legal loopholes. Employing suitable digital invoicing tools can thereby facilitate the process to help corporations improve their cash position or even simplify their entire accounting protocol. With that, businesses ought to consider adopting user-friendly SaaS invoicing software to elevate their cash management calibre.

With that, the smart credit control platform, Kolleno, is well-equipped to help professionals manage their invoices efficiently. It offers end-to-end accounts receivable software to streamline the invoice management journey.

Frequently Asked Questions (FAQs)

What Is an Invoice?

An invoice is a legal document summarising the products and/or services provided by the business to the customer, the total payment amount due, as well as the company’s preferred payment approach.

What Is the Purpose of Invoices?

Invoices are a helpful document for accounting as they assist the company and the customer in keeping detailed records of past sales transactions and the amounts owed by the buyer.

Is An Invoice A Receipt?

An invoice is essentially a document confirming the customers’ receipt of the products and/or service, followed by a request by the company for payment. On the other hand, a receipt is a document showcasing proof of payment by the customer.