An Invoice is an official financial document issued by a seller indicating the details of a sale, such as the products, quantities, and agreed prices for products or services the seller has already provided the buyer with.
Invoices ought to have the title “Invoice” and an invoice number. An invoice communicates how much a client owes a seller and is therefore issued to collect payment for services or goods provided by the seller. Additionally, it outlines the date and terms of the transaction. As a result, it becomes an essential record document and can be used for accounting purposes in a business by using the invoice number to refer to the appropriate invoice.
The invoice provides an itemized list of all financial details such as discounts, late fees charges, shipping, freight, tax charges, and any other charges associated with a transaction. These applicable charges are then summed up, and the total amount owed is indicated.
Businesses can issue invoices at the end of the month to their clients or after transactions depending on the business model or type of transaction. Multiple invoices should be generated so that each party (seller and buyer) gets a copy of the document.
Traditionally, paper-based invoices were used. However, currently, computer-generated invoices are commonly used. Computer-generated invoices can be printed at the seller’s convenience or sent via email, and thus they have optimized the referencing and issuance of invoices in business.
Difference between Invoice, Bill, and Receipt
Often, the terms invoice and bill are used interchangeably to refer to the same document. The difference, however, comes as a result of the utilization of the document. The seller refers to the document as an invoice, and once the buyer receives it, it is referred to as a bill. Therefore the term invoice refers to a document that businesses or sellers use to seek compensation from their clients. In contrast, a bill refers to a document used by buyers to identify how much they owe to a seller for certain goods or services.
A bill is used when the seller seeks immediate payment, whereas an invoice will usually be used when the seller seeks payment at a later date. Invoices have to be structured in a certain way as they are expected to be legally compliant. This will always necessitate the seller to include detailed information about the transaction such as VAT, customer details, comprehensive product/service descriptions, etc. On the other hand, a bill contains less information and will often not outline the customer’s details.
An invoice can be recurring, meaning the same invoice can be issued periodically, but a bill is used as a one-time document. As a result, invoices are more prevalent among B2B transactions, while bills are used in retail businesses where customers receive and pay for goods simultaneously.
On the other hand, a receipt is a document issued by the seller once payment for services and products has been received. It is kept as proof that a certain amount of money was paid at a specific date. A receipt breaks down all the services and goods paid for and the parties involved in the transaction.
Evolution of Invoices
Invoices have evolved throughout history. As a result, businesses have devised ways to make invoices more efficient and integral to business models.
The following is the step-by-step evolution of invoices:
Mesopotamian merchants used stone invoices in the early 5000 BC. They engraved transaction details on clay or stone tablets. Basic maths was used for calculations in the invoice.
From stone invoices, business owners adopted hand-written invoices. The transaction details were hand-written on different surfaces such as parchment, animal skin, and later on paper. Hand-written invoices were more advanced than stone invoices, and they contained most components found in modern invoices. Signatures or seals were used to authenticate the invoices.
Electronic invoices, later on, came to be adopted with the invention of computers. Electronic invoicing enhanced invoicing in business by optimizing storage, sharing, and monitoring of invoices in business. E-invoicing was cheaper, easier, and faster than paper invoicing.
The expansion of the internet into business models led to the adoption of online invoices, which were more secure and convenient than e-invoices. Transactions could be made online, and the invoice would automatically be generated and sent via email.
The most recent development of invoicing is mobile invoices. Sellers can now send invoices directly to the client’s mobile phone. Mobile invoicing allowed sellers to issue and buyers to receive invoices from wherever they were. Mobile invoices are more instant/automated and secure than online invoices.
Types of Invoice
The type of invoice will vary depending on the customer being served or the type of transaction. Despite the variations in the different types of invoices, the key components of the invoices will normally be consistent.
The different types of invoice templates commonly used are:
A pro forma invoice is issued by the seller before the completion of the transaction – before delivery of products or completion of services. It is not issued as a demand for money but merely a statement of how much the products or services will cost the buyer once the transaction is completed. As a result, its quoted total cost may change in the future.
Download: Microsoft Word (.docx)
Commercial invoices are used by businesses when they make international transactions. It outlines the date of shipment, country of origin, the product's weight, type of product or services, etc. This information is essential for customs declarations.
Download: Microsoft Word (.docx)
Credit notes invoices
Credit note invoices are used if a buyer returns a product due to defaults, damage, or mistakes. It outlines the revised payment owed to the seller. If store credit or a discount will be given to the buyer, it should be outlined.
Download: Microsoft Word (.docx)
Businesses or individuals such as freelancers will, in some cases, offer their services on a time basis, such as hourly. A timesheet invoice template is used to communicate how much the client owes the seller in such a transaction.
Download: Microsoft Word (.docx)
Retainer invoices are issued when customers make an advance payment before a transaction is completed. Some businesses will require a deposit to be made before they can deliver goods or offer services. The advance payment is later deducted from the final payment expected from the client.
Download: Microsoft Word (.docx)
Recurring invoice templates are meant for recurring or periodic transactions such as subscriptions. Recurring invoices are sent at regular intervals.
Download: Microsoft Word (.docx)
Functions of an Invoice
An invoice offers the seller a wide range of benefits. The benefits span from recording keeping to legal protection. This article will look into the different reasons why sellers should opt to incorporate invoicing in their businesses.
These reasons include:
An invoice is a legal document that can be presented in court as proof of a transaction between a seller and a buyer. Since it contains essential information about the transaction, there is sufficient proof in an invoice that can be used to determine a case. Sellers can then protect themselves from fraudulent transaction claims in the future.
Invoices can be analyzed to determine essential information in running a business.
Sellers can identify the products or services with the highest demand, peak demand periods, customer buying patterns, customer profiles, etc.
This information is commonly used to develop objective business strategies.
Invoices are essential record-keeping tools in the business. Invoices contain exhaustive sales details and, therefore, can be used as sources or reference materials when the sellers want to determine previous transactions.
Easy tax filing
While being record-keeping tools, invoices are important when a seller is filing for taxes. Invoices the accurate information is captured when filing taxes. In case of any misunderstandings, they can be provided as evidence of transactions a seller closed in a fiscal year.
Payment tracking: keep track of accounts payable
Businesses use invoices to keep track of accounts payable and any other transactions obligations due. Sellers can identify the customers who haven’t cleared their debts and the deliveries or projects that are still pending. Most customers will usually want to pay later; not having an official record of the amount might result in misunderstandings and disputes.
Internal auditing and accounting are essential in important in sustaining a business. Invoices are used for internal controls in accounting, for invoices have to be cleared and approved by the responsible personnel. This ensures that only approved transactions are completed. Resources needed to deliver services or goods can then be provided by management.
Essential Elements of a Blank Invoice Template
An invoice has to be detailed and comprehensive. It should outline all the necessary details of the transaction. Therefore, when preparing an invoice, this information ought to be captured. An invoice template contains all the blank sections/elements needed to provide all the needed to come up with a professional and legal invoice. The user fills out the document appropriately depending on the transaction.
These fundamental elements of an invoice template include:
An invoice number or invoice ID is a unique number assigned to every invoice in a business. The invoice ID is used to identify a specific invoice and consequently a transaction completed by the seller. The invoice number can have both numbers and letters depending on the referencing system adopted by the seller. The invoice numbers do not have to be sequential; they can be chronological, based on customer ID, project ID, or product or service type. No two invoices should have the same invoice number for the invoices to be distinguishable.
Date of service rendered
The invoice template ought to have a date section where the seller indicates when the transaction being invoiced was offered. The date should show the specific day, month, and year.
Date of sending the invoice
Invoices need to be dated. This is the effective date when the invoice is issued – the effective date. A section to indicate this date should appear on the invoice template. This issuance date is also referred to as the billing date.
Contact and name of org/seller
Since an invoice binds two parties: seller and buyer, they must be clearly identified. Therefore, the invoice template has a section where the seller can provide their name and contact information such as physical address or phone number. Contact information is essential for communications between the parties.
Name and contact of buyer
The buyer should also be identified in the invoices. Similarly, the buyer’s name and contact information should appear in the invoice template.
Terms and conditions
Applicable terms and conditions of the transactions must be declared in an invoice. The template ought to prompt the seller to provide this information.
Examples of terms and conditions are:
Due dates, consequences of non-payment, etc.
A line detailing each product or service
An invoice template has a section where the seller can list all the products or services the customer is billed for. Each product or service should be sufficiently described.
Cost per unit of product
In the invoice template, the seller should indicate each product or service’s unit cost listed in the product/service description section. The exact amount that defines a unit should be supplied.
Applicable taxes to the products or services rendered must appear in an invoice. The template must then prompt the seller to provide this information. The total taxable amount should be clearly indicated.
The total amount owed with currency
A section where the total amount owed by the customer should be provided in the template. The total amount must be clearly indicated in figures and the monetary unit being used in the particular transaction.
A personalized note
Invoice templates will typically have a section where sellers can add any additional information, such as a thank-you note.
Following are some free downloadable templates for you:
You can download a blank invoice template online for free. Within minutes, you can have a professional customize the invoice to help your business excel.
Advantage and Disadvantages of Invoicing
The use of invoices in business has its merits and demerits. This article will look into these advantages and disadvantages of invoicing to give businesses more insight into what to expect when using invoices.
The positives of invoicing are several and will normally be influenced by how well invoicing is being implemented in the business.
- Incentivizes payment. In transactions where payment is not made upfront, such as B2B transactions, an invoice must be sent for payments to be made.
- Offers accurate records of transactions. Invoices can be kept as long as necessary. Businesses and self-employed individuals can use them to declare their sales and earnings for those periods.
- Improves branding and business-client relationships. If well prepared, invoices can be used to send a positive message of a business’s openness about their charges which improves the customer’s trust and loyalty to the business. In addition, well-designed invoice templates reflect well on the company’s brand/image.
- Acts as a reminder to clients. The invoice lists the products or services a buyer is being charged for; this way, if they had forgotten about them, they are reminded to make payments. This way, accounts payable are efficiently recovered.
The use of invoices has its shortcomings. The disadvantages are normally a result of poor implementation of invoicing, not the document itself.
These disadvantages include:
- Delayed payment. If poorly prepared, an invoice can result in misinterpretation, which results in disputes that further delay payments.
- Invoices can be easily challenged if the transaction details are not precisely noted in the invoices. The charges should, therefore, not be based on estimates.
- When the invoice generation process is slow, late issuance of invoices would be delayed, inciting or creating a culture of relaxed settlement of debts among customers.
Tips for Invoicing
How can invoicing be optimized? There are several things businesses and sellers can do to ensure invoice templates work to their benefit.
- Promote timely payment among the buyers while at the same time enforcing timely invoice generation.
- Request upfront payments whenever possible.
- Opt to use recurring invoices in any situations where it is applicable.
- Automate invoicing
- Make invoicing as convenient as possible for each category of customers.
- Build close relationships with customers such that there is no need for follow-ups once invoices have been issued.
- Stop delivering products or offering services if the customer fails to pay on the agreed time.
Invoice Softwares and their Uses
Invoice software is a tool provided by SaaS (Specialized as a Service) companies to assist people with invoicing. Invoice software automates the process, and therefore transactions can be quickly processed, and businesses are assured of timely payments. In addition, they offer options to have clients pay online and generate receipts once payment has been received.
Managing invoices also becomes more accessible. Invoicing software provides pre-made invoice templates businesses can fill out and email to their customers. In addition, the invoices generated from the software are legally compliant, making the seller’s work even easier.
The following are the general functions of invoicing software:
Create customized invoices
Through invoicing software, sellers can create what suits their preferences. The software offers a wide range of invoice template varieties users can choose from. In addition, the template’s appearance and feel can be modified to suit the business’s brand.
Automate your workflows
Different actions of invoicing can be automated in invoicing software. The user then does not have to repeat these activities every time they are preparing invoices.
The generation of recurring invoices can be automated such that they are generated and sent to the appropriate client with a click of a button.
Make payments easy and secure
Payments made through invoicing software are ordinarily straightforward and secure. This offers customers a high level of convenience and assurance that they will not lose money paying for products or services without physical payments. Sellers are also able to collect payments from anywhere in the world. In addition, payments made via invoice software are PCI IDSS compliant and thus secure.
Improve customer relations
Invoicing software will normally offer CRM support services as well as an option to create client portals. These added services make it easier for customers to keep track of transactions made with the seller, which offers more convenience to customers.
Some of the advantages offered by invoicing software are as indicated below:
- Invoicing software saves businesses money that would otherwise be used for traditional invoicing and billing, which requires hiring staff and obtaining the necessary equipment.
- Automated invoicing is quick, which saves time for the seller. The time that the seller would have otherwise used to generate, follow up, and manage invoices can be directed to other activities.
- Invoicing software reduces fraud as invoices can be sent directly from the authorizing party to the client, and payments can be made directly to the business’s account.
- Using invoicing software ensures timely invoicing is done and, consequently, timely payments are made, thus improving cash flows within a business.
- Invoice software facilitates the growth of customer relations as errors in the invoicing process can be quickly resolved, resulting in customer satisfaction.
Frequently Asked Questions
Ordinarily, an invoice does not have to be used in transactions where payment is required upfront or on-time purchases where there will not be an ongoing relationship with the client. Examples of businesses that do not have to use invoices are retail and e-commerce. Also, businesses in the hospitality industry such as cafes, bars, or restaurants will normally require the customer to pay at that specific moment hence seldom using invoices.
The dates on an invoice are when the goods were billed and when the transaction was invoiced. The date is essential because it dictates the due date of the bill and the credit duration to be awarded to the customer. Therefore, the date becomes crucial for businesses that offer credit, such as net 30, where the actual due date of the invoice is 30 days after the effective date of the invoice. The invoice date is also considered by companies that offer the option to return goods to customers when determining if the deadline date has expired. The invoice acts as proof of the purchase date in this case.