What is an invoice and why do you need one to accept payments?

Whether you’re new to invoicing or are looking to change how your business communicates with its customers, knowing the ins and outs of invoicing will help you improve your payment process, increase your cash flow, keep track of your records, and much more. Learn how invoicing supports profitable operations.

woman managing invoices on laptop

The ins and outs of invoicing

You know they’re important, and just about every business uses them—but what is an invoice exactly?
An invoice is a document that companies use to itemize and record transactions between the seller (the business) and the buyer (the customer). Invoice numbers should be sequential and not repeated for any customer.

This itemized list includes the goods or services provided to the buyer.

invoice example

After the business delivers the goods or service, it will send an invoice to the customer or client. The invoice tells the client how much they owe. It also lists other information, including the payment terms, invoice date, and available payment options.

Why your business needs invoicing

It may be easy for small businesses to rely on third-party payment processors like Venmo, CashApp, and Zelle. However, it’s also a good idea to use official invoicing software to keep track of important information and records—and here’s why:

#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 does an invoice include

All your invoices will have specific details. For record-keeping and tax purposes, your invoices should include the following:

invoicing checklist example

The word “invoice”

The business logo or business name should go next to the “invoice” title at the top of the page. You should also include your business contact information near the logo, including the name, address, and phone and fax numbers.

Invoice number

An invoice number (also called an invoice ID) is a unique sequential number assigned to each invoice you issue. Expense software will assign invoice numbers sequentially, so they’re easy to keep track of.

Invoice and sell dates

The invoice will include the date you provided the service (or sold the goods) and the date you sent the invoice.

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—payment 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

invoice payment terms

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.

Description of good(s) and/or service(s)

The typical invoice will have a description line, the number of units, and the cost per unit with the total as the bottom line.

Let’s look at an invoice example so you can see what it should include for the description section. Here’s what a vending machine company that supplies small businesses with snacks might list on their invoice:

price breakdown for business items
  • Personalized or internal notes. Many businesses choose to leave a message at the bottom of the invoice. Doing this is optional unless you have specific terms or reminders to relay to the client. Otherwise, you can use that description box to express gratitude for your client’s patronage, which helps strengthen your relationship and increase customer loyalty.

Common misconceptions about invoices

#1: Invoices are not receipts

“Is an invoice a receipt?” This continues to be one of the most common questions that accountants or expense managers get.

It’s easy to see the confusion since invoices are official payment collection notifications—but even if the client pays, an invoice still isn’t the same as a receipt.

Receipts are documents that confirm a customer has received the goods or services and paid for them. On the other hand, an invoice is a notification to a buyer asking them to pay for what your business provided.

Therefore, a receipt is separate from an invoice. In fact, you might send a receipt to a customer after they pay, as it proves that they fulfilled the invoice, and they might need this for their records.

#2: Bills are not the same as invoices

Invoices are also commonly confused with bills since they’re both records of goods delivered. They both request payment from a customer and are issued before payment has been made.

The difference is that an invoice documents a sales transaction and is a formal recorded request for payment later. A bill confirms a sales transaction and is a legally registered request for immediate payment.

Invoice example: You hire a landscaping company to mow your lawn every two weeks. After each service request is completed, the company sends you an invoice requesting payment. Payment completion depends on the payment terms that the landscaper requests.

Bill example: You go out to eat at a restaurant, and when you’re finished, the waiter brings you the check. The restaurant is requesting immediate payment from you as the customer. The payment is completed right away at a cash register, and then you’ll receive a receipt.

#3: Getting an invoice doesn’t automatically mean payment

Whether paper invoices or online invoices, sending one is considered an official payment request—but it doesn’t automatically guarantee that the business will make any payment.

What is an invoice used for if it doesn’t imply payment right away?

Invoices are a bit more flexible than bills, which means the customer can pay later according to the business’s payment terms. Payment terms include a specified length of time given to a customer or client to pay off the amount due for goods or services rendered.

Common types of invoices

So far, we’ve been discussing a standard invoice, which is the most common type a business will use with their clients. But when a company has a specific task that a standard invoice won’t cover (like issuing credits), they’ll use other types of invoices.

Standard sales invoice

A standard sales invoice is what it sounds like. A standard invoice has all the basic elements, like contact information, invoice number, description lines, and payment terms, with a basic format that a business can customize to almost any need.

Pro forma invoice

This is a specific invoice that a business sends to a client before providing any goods or services. Instead of requesting payment, a pro forma (Latin for “as a matter of form”) gives the client an estimated cost of completing or providing the work before it’s done.

For example, an interior design agency might send their client a pro forma invoice to estimate how much a renovation will cost. These invoices may be adjusted after the services are complete to accurately represent the hours and overall costs.

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 and debit invoices

A credit invoice, also called a credit memo, reduces the amount that a client owes a business. Depending on the reason for reducing the invoice, it could be a write-off or a “bad debt” on the business side. On the other hand, a debit increases the amount a client owes the business.

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 your business can do with invoice software

Trusted companies like PayPal, Square, and Stripe are well-known for their internal invoicing tools. These tools are available to businesses and customers globally, but they don’t provide everything a company may need, like customized invoices or ease of payment tracking.

creating an invoice with invoicing software

Instead, growing businesses need to invest in invoicing software, which can prove beneficial in several ways. Invoice management solutions like the one shown above are designed to fit your business’s needs and streamline the invoicing process.

Here’s what you can do with invoicing software:

#1: Create custom invoices

As you know, there are several different types of invoices you might need to send to your clients, whether that’s a retainer invoice, standard invoice, a pro forma invoice, or anything in between.

So instead of curating different formats, you can choose premade invoice templates and customize them to your preferences.

#2: Automate your workflow

Automating your workflow streamlines all of your critical information, making accounts payable and accounts receivable operations as simple as possible. With invoicing software, all of your invoices are kept in one place, providing a simple look into what services you’ve offered, what you’ve been paid, and who still owes payment.

#3: Ensure safe and prompt payment

Invoicing software allows for prompt payment by giving customers choices on how to pay. Additionally, sending electronic invoices makes the payment process simple because it takes minutes, anytime, anywhere. And with encryption, you can also count on secure transactions.

#4: Increase your cash flow

Businesses need a steady cash flow to thrive. Prompt cash payments from invoices lead to better cash flow, which means you can more easily measure how much is coming.

With this information, you can ensure you’re able to pay all your business expenses on time. And with a steady cash influx, you’ll also be able to take concrete steps to fortify your business’s future.

Finding invoicing software for you business

Whether you typically work with a standard invoice or need a more specific type now and then, invoicing is the best way to keep track of your business’s income from clients. It makes record keeping easier, which will help during tax season, budgetary reviews, and if you have to chase payments.

Invoicing also enables you to analyze peak periods and identify popular products and services, which can help you better manage marketing strategies and short-term or long-term plans.

One of the best ways to make the most of your invoicing process is by using the right tool. With helpful customization features and industry-leading account security, Divvy’s invoicing software helps you meet all of your expense management needs with confidence. Learn more about Divvy today.

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