Without an efficient and timely invoicing process, your business won’t be able to operate effectively. That’s why it’s so important that you understand the basics of invoicing and the important role it has in maintaining your cash flow.
In this guide, we’re going to explain what an invoice is, what it’s used for, the different types of invoice you can send and the details you should include.
Very simply put, an invoice is a formal payment request for goods and services that you have already provided or will provide in the future.
It should contain all the details the customer will need to make the payment, as well as an itemised list of the products or services provided and their cost.
An invoice also serves a secondary purpose. It’s an important document for tax purposes and should be kept as evidence of your income and (where relevant) the VAT you’ve collected on the government’s behalf.
What is an invoice used for?
An invoice serves several different purposes. Those include:
To request timely payment from customers
An invoice provides a formal record of a transaction and includes a due date that a customer’s payment should be made by. After that point, you’re legally entitled to charge interest on the overdue payment.
To keep track of sales
An invoice creates a written or electronic record of a sale being made. That helps businesses to protect themselves and is important for bookkeeping purposes.
To record business revenue for tax returns
Businesses must keep a copy of all invoices for tax purposes. They provide a summary of commercial transactions and help businesses to complete and file accurate tax returns.
To track inventory for businesses selling products
Invoices can be used to track items that have been sold. That can be helpful when it comes to managing and reordering stock.
Legal protection
Invoices also provide a legal record of a sale. That helps to protect small businesses from fraud and allows them to take action if a customer refuses to pay.
When to issue an invoice
Invoices are most commonly sent to customers or clients after services or products have been provided. However, that can change depending on the type of business you operate and your relationship with the customer. Invoices can be issued:
In advance - If you have to buy raw materials to fulfil an order or require a deposit, you may invoice the customer before the work is done.
On the spot - Issuing an invoice as soon as the work is done is common in industries such as the trades and some professional services. This helps to ensure you receive prompt payment.
After you’ve completed the job - Some businesses allow 24-48 hours before invoicing to ensure their customers are happy with their work, while others invoice at the end of the month.
How invoicing works
In theory, invoicing is a very simple process that shouldn’t cause businesses too many problems. The invoicing process is as follows:
Your customer agrees to purchase goods or services from you
You complete the transaction and provide the goods or services as requested
You create an invoice that includes the details of the transaction and amount due, and send it to the customer
Your customer processes the invoice and arranges to make the payment by the due date.
The due date arrives and the payment is made in full.
Unfortunately, the process doesn’t always go quite so smoothly. Finding the time to invoice, getting clients to make payments on time and chasing them when they don’t can be some of the most frustrating aspects of running a business. That’s where our invoicing software can help.
Invoicing and more made easy
We hope this blog post on understanding invoices has been helpful. Want to learn more about how to make your small business shine? Check out our blog for more useful posts.
