Invoice explained: what it is and how to create one

Published Tuesday 21 April 2026

Table of contents

• What is an invoice?
• How do invoices work?
• What to put on an invoice
• How do you create an invoice?
• What are the different types of invoice?
• When does an invoice get paid?
• What is invoice accounting?
• Managing your invoicing process
• FAQs on invoices

Key takeaways

• Include all required details on every invoice, such as a unique sequential invoice number, itemised services, VAT information, and clear payment terms, to stay compliant with HMRC rules and avoid fines of up to £3,000.
• Send invoices as soon as you complete work, set shorter payment terms where possible, and follow up immediately on overdue accounts to reduce late payments and keep your cash flow healthy.
• Choose the right invoice type for each situation, whether that's a pro forma for quotes, an interim invoice for long projects, or a credit memo for returns, so your billing is accurate and professional at every stage.
• Keep all invoices for at least six years, in paper or digital form, to meet HMRC record-keeping requirements and support accurate tax reporting.

What is an invoice?

An invoice is a document you send to customers requesting payment for goods or services you've provided. It lists what you delivered, how much is owed, and when payment is due.

Invoices serve two critical purposes:

• Payment collection: Create a clear payment request with specific amounts and due dates.
• Tax compliance: Provide required documentation of your revenue and VAT collection for government records, which you must retain for at least six years.

How do invoices work?

Understanding the invoicing process helps you manage your cash flow and keep your business running smoothly. The lifecycle of an invoice involves a few clear steps from start to finish.

Here's how the typical invoicing workflow operates:

• Agreement stage: Agree on the work to be done and the payment terms with your customer.
• Work completion: Deliver the agreed product or service to the customer.
• Invoice creation: Generate a document detailing what's owed and when it's due.
• Sending: Deliver the invoice to your customer so they can process the payment.
• Payment window: Wait for the customer to pay within the agreed timeframe.
• Receipt: Receive payment of the amount due.
• Recording: Update your accounting records to show the invoice is paid.
• Follow-up: Send reminders to collect the outstanding amount if payment is late.

For the seller, this process ensures you get paid for your hard work and maintain accurate tax records. For the buyer, it provides a clear record of business expenses and helps them track their own outgoing cash flow.

What to put on an invoice

Include these specific details for legal compliance and clear payment terms:

• Business information: Company name, address, and contact details
• Customer information: Client name, billing address, and contact details
• Invoice specifics: Unique invoice number and issue date
• Payment terms: Due date and accepted payment methods

You also need to include transaction details. These show exactly what you're billing for:

• Itemised services: Description of goods or services provided
• Pricing breakdown: Quantities, unit prices, and total amounts
• Tax information: VAT rates and amounts (if applicable)

For more detail on what to put on an invoice, check out the guide on how to make an invoice.

How do you create an invoice?

To create an invoice, add your business details, list your products or services, and set clear payment terms. Follow these steps to build a professional invoice that gets you paid on time.

1. Choose a template or software. Start with a clean, professional invoice template or use accounting software to automate the process.
2. Add your business details. Include your business name, address, and contact information so your customer knows who the invoice is from.
3. Include customer information. Add your customer's name and address to ensure the invoice reaches the right person.
4. Assign a unique invoice number. Use a sequential numbering system to keep your records organised and make each invoice easy to track, as HMRC regulations require a sequential number that uniquely identifies the document.
5. Detail the products or services. Clearly list each item, a brief description, the quantity, the price per unit, and the total amount for each line.
6. State the payment terms. Specify the due date and the payment methods you accept to make it easy for customers to pay you. See the guide on invoice payment terms for more details.
7. Calculate the total amount. Add up all the costs, include any taxes like VAT, and show a clear final total.

What are the different types of invoice?

Invoice types vary based on your billing situation, project stage, and compliance requirements. Choosing the right type helps you get paid accurately and on time.

Payment-focused invoices help you collect money from customers. Here are the main types:

• Sales invoice: Standard payment request you send to customers
• Past due invoice: Invoice you resend and mark as overdue to prompt payment
• Recurring invoice: Automated billing you send for subscription or regular services

Project-based invoices help you bill for work at different stages. Here are the main types:

• Interim invoice: Progress payment request you send during long projects
• Final invoice: Last payment request you send when a project completes
• Pro forma invoice: Price quote you send that's not legally binding

Legal and compliance invoices meet specific regulatory requirements. Here are the main types:

• Tax invoice: VAT-inclusive billing that registered businesses send
• Commercial invoice: Legally binding document you use for import/export
• Credit memo: Document you issue to reverse previous charges for returns or overcharges

When does an invoice get paid?

Customers typically pay invoices within 14 to 30 days, depending on your payment terms. However, late payments remain common, with a 2023 survey finding nearly half of small and medium-sized enterprises (SMEs) and freelancers had payments over 15 days overdue.

These strategies can speed up payments:

• Shorten payment terms: Set seven-day terms instead of 30 days to speed up cash flow.
• Secure upfront agreements: Get payment terms approved before starting work.
• Send immediately: Issue invoices as soon as work completes rather than at month-end.
• Track systematically: Monitor paid and unpaid invoices daily.
• Follow up promptly: Contact overdue accounts immediately when payments are late.

For more tips, see the guide on how to set up an awesome invoicing system.

What is invoice accounting?

When you account for invoices, you track the financial impact of your billing by recording payments received and managing unpaid amounts. Here's how it works:

• Paid invoices: Record as income entries when customers complete payment.
• Unpaid invoices: Track as accounts receivable until payment arrives.
• Automated tracking: Handle most entries automatically through accounting software.
• Professional support: Ensure accurate recording and compliance with bookkeeper assistance.

Managing your invoicing process

When you invoice well, you do more than ask for payment. It helps you maintain healthy cash flow, keep accurate records, and build professional relationships with your customers.

Clear, timely invoices make it simpler for customers to pay you. That means less chasing and more confidence in running your business.

Using accounting software streamlines these steps, from creating invoices to sending automatic reminders.

FAQs on invoices

Here are answers to common questions about invoices.

What's the difference between an invoice and a receipt?

An invoice requests payment before or shortly after you deliver goods or services. A receipt confirms payment has been received and serves as proof of the transaction.

How long should I keep invoices?

You must keep invoices for at least six years to comply with HMRC requirements. This applies to both paper and digital records.

Can I send an invoice before completing the work?

Yes, you can send an invoice before, during, or after completing work, depending on your payment terms. Many businesses send interim invoices for large projects or require upfront deposits.

What happens if a customer doesn't pay an invoice?

If a customer doesn't pay within your payment terms, send a reminder. If the invoice remains unpaid, you may need to escalate with formal collection procedures or seek legal advice for debt recovery.