Do you own a business? If yes, you may have heard of a business invoice before. For those of you that are new to the concept of invoicing, you can learn everything you need to know in this guide. If you already have an invoicing system in place – great! However, it’s important to ensure that you’re protecting yourself and your business by invoicing properly which you can learn more about in this guide. Whether you’re new or accustomed to invoicing, there is always something you can do to perfect your invoicing process.
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What Is A Business Invoice?
A business invoice is an official, legal document that requests payment from a customer for products or services provided by a business. Invoices are important documents because they establish an obligation for the customer to pay the business. In other words, an invoice is written confirmation of an agreement between a business and a customer for products or services provided. Invoices are crucial documents for businesses because they track payments, determine outstanding sales, and help establish and maintain healthy relationships with customers.
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Types Of Invoices
How a business operates can vary substantially, especially from industry to industry. For this reason, there are different types of invoices that have unique purposes. Let’s take a look at the various types of invoices below.
Proposal Or Bid
For large projects, clients may want to know an estimate of how much everything will cost. In this case, businesses will create a proposal or bid which details all of the costs and their estimated fee. It should clearly state on the invoice that the amount is an estimate, not a final bill.
If you’re doing extensive work for a client, it may make sense to invoice them in increments, as opposed to one large fee at the end of the work. An interim invoice requests payment from the customer for a portion of the total fee. At the end of the work, you should send a final invoice, discussed below.
Final invoices are used at the end of large projects and display the final fee related to your products or services. If there were interim invoices and payments throughout the project, the final invoice should show the previous payments subtracted off the total cost, leaving the remaining amount to be paid.
Past Due Invoices
If a client hasn’t paid an invoice, it will be considered past due. If you have the policy to charge a late payment fee, you will need to send an updated invoice that reflects the outstanding balance plus the late payment fee. In addition, you should follow up on overdue invoices regularly as a collection process.
If you provide a product or service for a customer on a regular basis, you may want to send recurring invoices to the customer. A recurring invoice is sent on a regular basis at agreed-upon intervals and pricing. For example, if you’re a housekeeper, you may bill a customer $100 every week for your services.
Importance Of Business Invoices
Business invoices do more than notify the customer of your fee and products or services rendered. They impact other aspects of your business, let’s explore all of these aspects below.
- Taxation. The amount of income your business earned is one of the basic pieces of information required for taxation. Invoices track completed work, what has been paid and what is outstanding. In addition, if you’re ever audited by the CRA, they may request to see invoices to verify your income.
- Legality. Invoices can protect businesses from legal issues, such as fraud or civil lawsuits. An invoice is a legal document that states a business provided a customer with a product or service at a specific point in time. If a customer does not pay an invoice, you have paperwork to support your case in the event that the law becomes involved. An invoice with a signature is particularly valuable because it demonstrates a written agreement.
- Record Keeping. The most basic reason to prepare invoices is to maintain records of sales. Invoices are a valuable accounting tool. Click here to learn about the three main financial statements all business owners should understand.
Difference Between An Invoice, Bill, And Receipt
An invoice, bill and receipt are not the same, but may occasionally be used interchangeably. To clear things up, an invoice is created by the business and is typically the term used on the business’ side, not the customer’s side. Invoices aren’t always sent directly before or after a product or service is provided.
On the other hand, a bill is a request for payment and is usually the term used by the customer. Often, a bill does not come with an invoice, for example, a bill at a restaurant or store. The expectation with a bill is that it be paid immediately for products or services provided.
Finally, a receipt is a record of payment for an invoice or bill. Receipts are also valuable records because they verify that you have paid a financial obligation and have ownership of a product or service.
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Is An Invoice The Same As A Purchase Order?
It is not uncommon for invoices to be confused with purchase orders. In simple terms, purchase orders are prepared before a transaction occurs and invoices are prepared after a transaction occurs. A purchase order is a record of what a customer ordered from a business or supplier. An invoice is created once the ordered products or services have been delivered.
Purchase orders are commonly requested by customers to support their internal processes. Usually, purchase orders are matched with invoices to ensure that was what ordered was received and billed correctly. Purchase orders can also be a part of internal approval processes.
How To Create An Invoice?
Invoicing can be created manually through programs such as Microsoft Office or Google Docs. If you’d prefer to streamline the process and integrate your invoicing into other accounting processes, consider obtaining accounting software.
Regardless of the program or software you use, there is specific information you need to include on your invoice. Inclusion of this information should not be overlooked because it establishes clear communication to the customer, adequate records, and a formal legal document. Below is a list of all the information you need to include on your invoices.
- Name of Your Business. Your business name should appear on the invoice to establish a brand and to allow the customer to identify you.
- Your Business Contact Information. If the seller wants to contact you with payment questions or future work requests, you’ll make their life easier by providing it on the invoice.
- Customer’s Contract Information. Who you are billing and their contact information should appear on the invoice under a “bill to” section. This ensures there’s no confusion about who owes you money for goods and services provided.
- Unique Invoice Number. Invoice numbers should be unique and sequential so you can stay organized. This becomes particularly important for tax and legal reasons.
- Payment Terms. The payment terms outline when the payment is due, penalties for late payment and discounts for early payment. Common payment terms are “Net 30” which says the payment is due within 30 days of the invoice date. However, you may want to shorten this to improve your cash flow or extend it to attract more business. In addition, you may want to charge a late payment fee to motivate customers to pay on time. Or, you can offer a discount to customers who pay early.
- Due Date. The payment terms are one thing, but the date when the invoice is due should also be shown on the invoice. This mitigates confusion for both you and the customer.
- Product Or Service Information. The particulars of the products delivered or services rendered, the quantity, rate, amount, subtotal, and taxes should all appear on the invoice. The more detailed you are, the better.
- Sales Tax. If you are required to collect and remit sales tax, usually GST, PST or HST, the amount of tax you are charging should be clearly shown in a separate line item. In addition, you should show your tax registration number provided by the government.
- Discounts And Fees. If you provide a discount to a customer, the amount should be shown separately. Alternatively, if you charge your customer an additional fee, such as a late payment fee or shipping fees, these amounts should be shown separately as well.
Below is a list of other features you may want to add to your invoice to appear more professional, but they are not mandatory.
- Business Logo. Adding your business logo to an invoice is an amazing professional touch and strengthens your brand.
- Accepted Methods of Payment. Not all businesses accept every form of payment under the sun, especially small businesses. To make payment easier for your customers, clearly list the payment forms you accept (ex: Debit, Visa, Mastercard, Google Pay) and provide details of how they can pay you.
- Customized Notes. A simple note such as “thank you for your business” or “we look forward to working with you again” can go a long way in the eyes of customers. You can also add slogans, mission statements, or other features of your business’ vision in a note.
Benefits Of Online Invoicing
Online invoicing has several advantages that paper invoicing lacks. Consider the below benefits of online invoicing before making a decision on your delivery method.
- Avoid “Lost in the Mail” Issues. It is much easier for a client to find an invoice in their email than to find a loose piece of paper lying around their office.
- Cost-Effective. Online invoicing is cheaper because you don’t need to pay for envelopes, stamps, and printing. In addition, you’ll save time because you won’t be stuffing invoices into envelopes.
- Get Paid Faster. The sooner a customer has your invoice, the sooner they can pay you. By getting paid faster, your cash flow will improve.
- Invoice Tracking. When you send invoices via email, you can always look back on when invoices were actually sent, which may be different than the invoice date. You cannot do this with paper invoices.
- Access Information Anywhere. If you’re working remotely, you can access online invoices anywhere because all information is stored in the cloud. With paper invoices, they’re stored in a filing cabinet.
- Environmentally Friendly. Online invoicing means you’ll be using less paper.
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Invoicing Your Way To A Better Business
As we explored in this article, invoicing your customers strengthens your business practices in many ways. The most notable benefits are staying organized and tracking sales, payments, agreements, and much more. Implement an invoicing system into your business today to better your business practices.