What is an invoice?
An invoice is a request for payment. It lists the goods or services you’ve supplied to your customer, and what they owe you in return.
Your invoices are also tax documents. You’re required to keep copies to show what revenue you earned and any tax you might have collected on the sale.
Why are invoices so important?
Invoices are a request for payment, so it goes without saying that you need to get them right. If you make a mistake, a customer may refuse to pay, or they may pay you the wrong amount. That can cause a lot of embarrassment and frustration on both sides.
Invoices are also tax documents, so you may get into trouble if they don’t comply with IRS requirements.
What to put on an invoice
An invoice should identify the supplier, the buyer, and the goods or services that were exchanged. Here’s what to put on it:
your company name, address and the invoice number
your customer’s name and address
details of the goods or service you provided and the cost
instructions on how and when to pay
If you collected sales tax on the sale, then you also need to show how much. Learn more in our chapter on making an invoice.
Invoice due date and payment terms
What use is an invoice if it doesn’t get you paid on time? Make sure you tell your customer when payment is due, and how to send the money. Include information like:
Deposit required: The amount of any deposit required.
Due date: How many days (from the invoice date) the customer has to pay and the date when payment is due.
Discount or late fees: The amount of any on-time discounts or late fees.
How to pay: The methods of payment you offer, eg, internet banking, credit card, PayPal, cash, check. Include your bank account number or a link so customers can pay online.
Payment terms example
Write your payment terms in plain English on your invoice and make it clear how you prefer to get paid. Here’s an example:
"Create an email address specifically for dealing with invoicing and accounting. For example, set up email@example.com and send all your invoices from that email. It has a psychological impact when it comes to asking to be paid."
Paco Nicole, The Hell Yeah Group, Xero partner
Different types of invoice
Now that you know what a basic invoice is, let’s look at some of the different types out there:
Sales invoice – if you send an invoice, then it’s a sales invoice (if you receive it, it’s a purchase invoice).
Interim invoice – if you require progress payments on a big piece of work, you could send one or more interim invoices.
Final invoice – the last in a series of interim invoices, a final invoice signals that the work is complete and that no other invoices will follow.
Recurring invoice – if you charge your customer the same amount every time, you can just send a recurring invoice. These are great for subscriptions or leases.
Pro forma invoice – these are often used to show the price of goods so that an importer can calculate the customs costs before buying. They are not a record of a sale.
Commercial invoice – these are also used to calculate customs on imported goods but in this case the transaction has taken place and the sale is official.
Credit memo or credit note – these reverse a charge from a previous invoice. They’re issued when goods are returned or when a customer was overcharged.
How invoicing works – from start to finish
There’s more to invoicing than you might think. It’s a process that begins when you take on a job and only finishes when the money comes in the door. There are quite a few steps along the way.
No one wants to be stuck in the office doing accounts, so automating as many steps as you can really helps.