What is an Invoice?

An invoice is a commercial document that a seller or business issues to a buyer. It can be issued both before or after payment for goods or services rendered. It includes a list of products and services that a business will provide to a client and how much the client must pay.

Invoicing is very important for small businesses as it enables them to get paid for their services while they keep a legal record of all the sales. It favors both the buyer and the seller as it expedites the payment process by alerting the client of the payment due.

Some people may confuse a quote with an invoice, well, they are not the same. A quotation is a formal estimate of the service or goods required hence it gets issued before any work is done. It provides an itemised list and expected costs and can be adjusted based on what the client needs.

So, a quote comes first, and an invoice follows after the work has been completed or a purchase has been made.

Types of Invoices

There are several different types of invoices that can be used depending on your business type. Following are some of the most common forms of invoices:

1. Proforma Invoice

Proforma invoices do not function like actual invoices. It is a type of invoice used before work or service is provided. The seller does not record the invoice as an account receivable or as an account payable and it is sent in advance and usually includes information such as the item’s weight or other details.

Proforma invoices are commonly used for international transactions to showcase the value of the goods for customs purposes. The invoice serves as a commitment from the seller to provide goods at a specific price. This type of invoice helps buyers to avoid unexpected costs once an exchange is complete.

In some cases, proforma invoices are issued to request advance payment from the client. This process act as a security for goods produced and it allows production to start.

2. Credit Invoice

A credit invoice or note is a statement that details a refund or credit to an invoice. It can be issued if goods are returned due to damage or mistakes and the customer asks for a refund or the business decides to give a customer a credit.

Credit invoices are more accurate in accounting for money moving out of the business as you wouldn’t have to delete an invoice that has been refunded.

3. Timesheet Invoice

Timesheet invoices are issued to clients that are charged for service rendered on an hourly basis. This can include car or equipment rental for a specific amount of time.

This type of invoice is mostly used by consultants, lawyers, psychotherapists, and other professionals whose services are more intellectual.

4. Retainer Invoice

Retainer invoice is used for clients that make advance payment for a product or service rendered. The amount gets deducted from the client’s final payment on delivery or completion of work.

5. Recurring Invoice

Recurring invoices are for repeating transactions like subscriptions.  They get sent to customers at regular intervals (monthly or weekly).

How to Create an Invoice

There are thousands of templates online, applications, and software such as QuickBooks, Xero, and Sage that you can use to create invoices online. These invoices will enable you to be efficient as you send invoices from your desktop or app as soon as the job is done.

All you need to do is sign up for the online software that is more appealing to you. This will save you time and energy as you won’t have to chase after payments. Your energy will now be used more on growing your business and improving your cash flow.

Free Invoice Generator

CoMoney has an easy to use and follow FREE invoice generator that allows you to create and download invoices/quotations, saving you time and money as you will be able to generate invoices quickly, in less than 5 minutes online using your phone or laptop.

Invoice Functions

1. Easy Tax Filing

An invoice help in keeping track of all transactions as you record and maintain all sales invoices which enables the business to report its income and ensure that it pays the correct amount of taxes.

2. Maintaining Records

This is the most important function of an invoice as it helps you keep a legal record of each and every sale. It makes it easy and possible to find when the sale was made, who made the purchase, and who sold it.

3. Legal Protection

An invoice serves as legal proof of an agreement between the buyer and the seller on a set price. It helps protect the business from fraudulent lawsuits.

4. Payment Tracking

An invoice works in favour of both the buyer and seller as it keeps track of their payments and amounts pending.

5. Business Analytics

Invoice analysis helps the business to find out what their client buying patterns are and can aid in identifying trends, popular products, and peak buying times. This will assist the business to develop and implement effective marketing strategies.

What to Include in an Invoice?

This may be different for each business, depending on the services or goods offered. For example, a Medical Doctor may want to include procedure codes for insurance reasons which is not the case for other businesses.

Most importantly your invoice should include the following:

  • Business details and correct contact details
  • Invoice number (also referred to as reference number)
  • Customer name and contact details
  • Date of sending the invoice and when the payment is due
  • Accurate prices and item description
  • Taxes, fees, and discounts
  • Total amount due (with currency)
  • Company or seller’s banking details
  • Terms and conditions

Bonus Tips for Invoicing

You might want to apply the following tips in your business so that your invoices get paid promptly:

  • Do and send out invoices in time
  • Make the invoicing and payment process more convenient for the clients
  • Automate invoicing
  • Get upfront payments
  • Where possible, use recurring invoicing
  • Communicate with your clients and establish payment terms in writing
  • Put work on hold or stop projects if a client doesn’t pay on time