What is an invoice? A beginner’s guide
It’s probably fair to say that invoicing will never be the most glamorous part of running a business. But invoices are some of the most important documents you or your business will ever create, so it’s worth getting a handle on them.
If you’re just starting out as a freelancer or you’ve just opened a small business, you might still be wondering, “What is an invoice?” or “How do invoices work?”. And with good reason: the idea of creating and sending your first invoice can seem quite complex at first.
That’s why we’ve put together this beginner’s guide to invoicing, to give you a basic introduction to the topic of invoices and how you can use them in your business to your advantage.
In this guide, we’ll cover:
The basic definition of an invoice
What invoices are used for
The most common types of invoices
What an invoice should include
How to send an invoice
So, before we get stuck in, let’s start with the basics.
Definition of an invoice
An invoice is a document that you send to your client after they purchase goods or services from you, both as a means of recording the sale and of requesting payment from them.
Specifically, an invoice declares in writing what exactly the client purchased, when they purchased it, in what quantity and at what price.
Purpose of an invoice
Invoices are legal documents that create a binding agreement between you and your customer that obliges the customer to pay the agreed price.
As a result, invoices can be used when taking more formal actions, especially in the case of overdue or missing payments.
That’s because, in addition to stating the total amount to be paid by your customer, invoices also identify the payment terms, including when the payment must be made by and what, if any, the potential penalties are for late payments.
What invoices are used for?
Invoices are an essential part of running a business and have lots of advantages. Here are some of the main ones.
Invoices prompt payment
Every business needs a healthy cash flow. Whether it’s for paying wages, paying bills or buying supplies, it doesn’t take much to understand why keeping the money flowing in is vital.
That’s why invoices are so important – they help you collect payments. More than that, a professional invoice that contains all the right information doesn’t just get you paid; it makes sure you get paid on time and in full, which is not always as straightforward as you might think.
Invoices keep track of sales and payments
Invoices are the easiest way of keeping a record of all your business transactions.
If you’re a business that sells products and buys supplies, then invoices serve as invaluable documentation of these commercial processes and help you to keep an eye on all the money coming in and going out.
They also allow you to follow up on any payments that didn’t arrive on time or were perhaps paid in the wrong amount.
For your customers, invoices serve the purpose of recording the sale and informing them of how much they need to pay and when, which is essential to keeping their own accounts in shape.
Invoices get you paid faster
The third major benefit of invoicing is that it often results in your customers paying you faster. After all, the sooner you send an invoice, the sooner your client can pay you. You can also specify a certain due date to make sure that your payment arrives with you quickly.
Of course, this is convenient for any business. But it’s especially useful to anyone just starting out, for whom every payment, big or small, can make a massive difference.
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How’s an invoice different from a bill or quotation?
The terms ‘invoice’, ‘bill’ and ‘quotation’ get bandied around a lot and are often used interchangeably. But bills and quotations are different documents entirely, with different purposes and varying significance.
A quotation is a document you might send a customer at the start of a potential sales process to provide an overall cost estimate for the goods or services the customer has expressed an interest in.
Unlike invoices, quotations are not usually highly detailed and, crucially, they carry no weight, as they do not oblige the customer to pay or proceed with the transaction in any way.
A bill, like an invoice, is a document sent after a sale has been made, which can lead to confusion.
But while an invoice contains a very precise set of details and is labelled specifically as an invoice, a bill is a more generic document with typically fewer details included. Bills may not be numbered sequentially or contain details about the customer.
What are the different types of invoices?
Unfortunately, there isn’t just one type of invoice out there – in fact, there are many. While they often serve slightly different purposes, they tend to include much of the same information.
Here’s an overview of the 5 most common invoices used by freelancers, contractors and small businesses.
This is the most common type of invoice and is the type described throughout this guide. A standard invoice records a sale between a buyer and a seller and seeks to collect payment from the buyer.
A commercial invoice is used when you’re selling your goods internationally and you need to provide a detailed cost description for customs officials.
A proforma invoice is a provisional bill of sale that you send your customer before providing your goods or services. It differs from a standard invoice in that its terms of sale are still subject to change.
As the name suggests, recurring invoices are used to make or request payments that happen on a regular basis. They come in handy if you have a contract which involves monthly payments or a customer who has an ongoing subscription for your services.
VAT invoices are used when you want to charge VAT on the sales you make or reclaim the VAT charged on the goods or services that you buy. They only apply to businesses that are VAT registered.
What should an invoice include?
Creating an invoice with the right information can make all the difference when it comes to getting paid. Even the slightest error or omission might lead to your customer not paying you on time, in full or at all.
Here’s a quick look at all the information you need to provide, no matter the type of invoice you’re creating.
Details to include
A unique invoice number
The date the invoice is issued
Your company’s name and contact details
A description of the goods or services
The date the goods or service were provided
The price of the goods or services
VAT, if applicable
The total amount owed
Payment terms, such as a due date
How do you send an invoice?
So, now you’ve created your invoice. What about sending it? Well, there are two main things you need to consider: what format to send your invoice in and when exactly to send it.
Creating an invoice might sound like a daunting task, but it really doesn’t have to be.
Yes, you can use Excel or Word – or even a pen and paper. But these methods are both time-consuming and prone to manual error.
Many businesses make their lives easier by using invoicing software to generate their invoices, which offer ready-to-use invoice templates that simplify the process.
Using an automated system helps you to avoid making mistakes that may impede your payment. And it’s worth noting that if your invoices feature miscalculations or other incorrect information, your customers have no incentive to pay you. After all, why would they want to pay the wrong sum?
With SumUp Invoices, you don’t even need a computer to issue your invoices. With just your phone or tablet, you can create and send professional invoices in under a minute and send them to your customers via email. It’s the simplest and safest way to record your sales and collect your payments.
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