Invoicing is critical to almost every business. While it may simple, this blog outlines what you need to know to do it right.
An invoice is a legal document issued by a supplier—or merchant—to a buyer, which itemizes the details of a purchase. It lists the products or services sold in exchange for payment the charges associated with each item, and when payment is due. Issuing an invoice is the first step to collecting payment. It helps establish an obligation on behalf of the buyer to pay their supplier and serves as proof of debt owed.
Invoices are commonly distributed in business-to-business (B2B) transactions and will typically be issued after the buyer has received their goods or services, but before payment has been made.
There are two key parties involved in the invoicing process—the supplier or merchant issuing the invoice and the buyer paying the invoice.
Businesses want to get paid on time. When a company’s accounts receivable (AR) department makes the decision to issue invoices, they’re taking on risk by allowing payment to be deferred until a later date. This is why it’s important businesses have a strong understanding of not only what invoices are, but how they work and when to use them. Knowing the main properties of an invoice will help businesses better understand the entire invoicing process and feel confident in creating, analyzing, and distributing invoices to their customers.
On the flip side, to approve, process, and deliver timely payment, the buyer’s accounts payable (AP) department must also know what to look for and how to analyze the invoices it receives.
In this article, we’ll discuss the following to help you learn more about invoices:
- When you should use an invoice.
- How you can create an invoice and the elements that comprise an invoice.
- How you can analyze invoice data.
- The departments that handle invoices.
- The differences between invoices, bills, and receipts.
When should you use an invoice?
Invoices are used when payment is collected by a supplier or merchant at a later date. For purchases where payment is received at the time an order is made (in ecommerce for instance), invoices wouldn’t be used.
For businesses supplying products, you would issue an invoice once delivery has been completed. For service-oriented businesses, you would issue an invoice once the service has been provided.
Invoices are a critical aspect of supplier operations, but they’re also very important documents for the businesses or individuals receiving them as they document their transactions for their own accounts payable purposes. Invoices can also be used as systems of record in the event purchases require disputing.
How do you create an invoice?
The first step in creating an invoice, is to generate an invoice number—also known as an ‘Invoice ID’. This is the unique number assigned to every invoice you create and typically appears at the top of the invoice. This element is crucial as it lets you easily identify individual buyer transactions and distinguish new invoices from those you’ve previously sent.
The invoice number may include any combination of numbers and letters and isn’t required to be ordered sequentially. You should, however, be consistent in how you identify your invoices and ensure you never assign an invoice number more than once to avoid any duplications and future bookkeeping errors.
Beyond generating a unique invoice number, here are six key steps we recommend following to create an invoice like this one:
1. Mark your invoice clearly
The average time it takes to collect on receivables is 41.56 days. To give yourself every opportunity to shorten that window, you’ll want to make sure your customers know your invoice is an invoice. When your invoice is clearly marked as one, customers are less likely to miss it in their inbox, making it more likely you collect payment on time. It could be as simple as writing “Invoice” at the top of the document.
2. Include your business name and information
Clearly list your business’ name, address, and contact information on your invoice. Be sure to include the name of the customer you’re invoicing, their address, and the name of your contact there so you can ensure the invoice reaches the right person.
The average dollar value for unpaid invoices per small business in the US is $84,000. Much of this is due to customers simply forgetting to pay, or not receiving the invoice to begin with. Prevent this issue entirely by making sure your invoices get into the hands of your customers right away.
3. Include a description for the goods or services you’re charging for
You’ll want to clearly detail in the description section of the invoice what your customers are paying for. Your descriptions don’t need to be long but should be thorough enough for your customers to understand what they’ve purchased. Be sure to include the quantity of items you’re charging the customer for and the prices you’ve agreed on.
4. Include your dates
Two key dates should be included on your invoice: the supply date—or the date you provided the goods or services to your customer—and the date you created the invoice. The supply date gives clarity into when a purchase actually took place, while the invoice creation date is the more important record here as it represents the day on which this transaction was officially recorded.
This date dictates the credit duration for your customers—an important fact when offering them terms like Net 30—and the due date of the invoice itself (typically 30 days after the invoice date). Mark this date clearly on the invoice, so your customer knows when they are expected to complete their payment.
5. Total the money owed
In addition to listing the itemized values for each good or service your buyer purchases, make sure you also include the total due at the bottom of the invoice. This will make it clearer to the customer what amount you’re expecting payment for. If you’re honoring any discounts, be sure the total amount reflects this adjustment (i.e., show the original amount minus the amount of the discount and the new total amount).
6. Highlight the payment terms
You and your customer will have agreed to some specific payment terms prior to completing your transaction. It’s a good idea to remind your customer of these terms on the invoice itself (e.g., 30 days, 60 days, etc.). Pro tip, if you’re looking to get paid faster, set your payment terms so that they align with your customer’s expectations.
You may also want to include exactly how you would like to receive the funds (e.g., credit card, ACH, check, bank transfer, etc.). Although, it’s good practice to offer your customer a diverse set of payment methods.
How do you analyze invoice data?
If you’re a buyer, when you receive an invoice from a vendor, there are five key things you can look at to understand its contents. We’ve numbered each of them on the sample invoice below.
1. Vendor’s contact information
The invoice you receive should clearly display your supplier’s name, their mailing address (if sending payment by mail), the name of your contact, their email address and phone number, and finally your supplier’s bank details. You will need all this information to know where to send your payment.
2. The purchase order number
The purchase order number lets your accounts payable department know whether you’ve previously authorized the transaction you’re being billed for. Your AP department will use this number to match the invoice to the original purchase order and complete the payment.
3. Invoice number
The invoice number on an invoice is created by your supplier and serves as a reference for the payment they will receive once you complete the transaction. When your AP department pays the invoice, the original purchase order will be closed out, indicating that the transaction has been completed. The invoice number is used as confirmation.
4. Description and pricing
This section outlines what goods or services your company is being invoiced for and the agreed upon pricing. The information found here should exactly reflect the descriptions and prices found in your purchase order.
5. Payment terms
The payment terms will tell your AP department when the supplier expects to receive their payment (i.e., Payable Upon Receipt, Net 30 Days, Net 45 Days, etc.), and which method the vendor prefers to receive their payment (e.g., check, ACH, bank transfer, etc.)
Are invoices sent to accounts payable or receivable?
When a buyer purchases goods or is provided services on credit, many suppliers will expect to receive payment at a later date. The amount owed by the buyer becomes accounts payable, while the supplier lists it as accounts receivable.
What’s the difference between invoices, bills, and receipts?
Through no fault of their own, many people refer to invoices as they would bills or receipts. Despite their similarities, there are important differences between each of these documents and they all serve a unique purpose.
Receipts are merely an acknowledgement that the supplier has received payment from the buyer, or that payment (from the buyer’s perspective) has been received. For customers, a receipt is proof of payment as well as proof of ownership of the goods received.
Like receipts, the terms “invoice” and “bill” are also used interchangeably, but there are important differences between these two documents, namely, in the information they contain. Bills generally don’t contain customer information and are more generic. A buyer will typically receive a bill without an invoice, for example, when shopping at a retail store or dining at a restaurant. The expectation with bills is that payment will be made immediately, rather than in the future.
Invoices, on the other hand, are legal documents that are regularly used for accounting and tax purposes. As mentioned earlier, they are highly descriptive in nature and will include information about the supplier and the buyer.
Invoices are not simply used for requesting payment. They list vital details like:
- The supplier’s and the customer’s names.
- The supplier’s company’s address, phone number, email address, and fax number (if applicable).
- The goods or services being exchanged and the exact quantities and prices.
- The date the invoice was issued.
- The total payment due.
Invoices are a specific type of bill, but not all bills are invoices.