What is an invoice and how to write one for your small business

What is an invoice?

An invoice is a commercial document given to a buyer by a seller that states the total amount due for goods or services rendered - which is a fancy way of saying it's the bill a business sends a client to get paid. An invoice lists the products or services provided by the seller, as well as payment terms, and any other information relevant to the buyer. For many businesses, the invoice also serves as the buyer's receipt.

What is an invoice used for?

Maybe you have not had to use an invoice before and still managed to receive payment successfully. However, as your business grows, that may not be the case. Besides helping you get paid, an invoice represents who you are as a company. It tells a story about your business — where you are, what services you provide, and what your company looks like. It says to the world that you are proud of what you do all the way through to the final receipt you deliver.

Here are some quick benefits of using an invoice:

• Helps get paid on time: By using an invoice, you give your business the best possible chance of getting paid on time. Reason being is invoices generally include payment terms and conditions, so you and your client are aligned on payment expectations.
• Monitors cash flow, payment tracking, and business analytics: By sending invoices, you can easily keep track of what has been paid, what is still outstanding, and what requires a follow-up. Plus, invoices can also help better forecast cash flow by giving you a look at what’s been paid and what’s coming up ahead, especially when it comes to recurring payments.
• Important for tax filing and record-keeping purposes: When filing taxes or maintaining updated business records, it’s imperative you track the income you received during the year — and sending invoices can make the process easier.

Different types of invoices

There are many types of invoices you can use to get paid, including:

• Commercial invoice: Also known as a standard or final invoice, this is the most common invoice for businesses to bill for their product or service and get paid on time.
• Timesheet invoice: A timesheet invoice demonstrates the hours a business or its employees spent on a particular project in order to charge the customer.
• Credit invoice: This invoice is issued when a business needs to refund or offer a discount.
• Recurring invoice: Recurring invoices are best for businesses that bill the same amount on a consistent schedule, such as weekly, monthly, or annually.
• Retainer invoice: Retainer invoices help businesses collect advance payment for a service. The funds collected on a retainer invoice are not considered income but rather a liability. Once the services are rendered, the payment is considered income. However, if they are not completed, the funds may be returned to the customer.
• Debit invoice: Debit invoices occur when a business needs to increase the amount a customer owes them.
• Pro forma invoice: This type of invoice serves as an alert for how much a project or service will cost.
• Interim invoice: Also known as a payment plan, an interim invoice is an alternative to sending one large invoice to your customer. Instead, interim invoices break down the cost into smaller payments as the project progresses.
• Past due invoice: This is an invoice reminder or message indicating the original invoice was not paid on time and is now considered late.

Different invoice formats

Just like there are many different types of invoices, there are also various invoice formats you can use. No format is better than the other — it all comes down to what makes the most sense for your business.

• Word: A Word invoice template is easily customisable. You can download it or create one using our invoice generator, which then gives you the ability to add your company information and logo, update the font, colour, and design, and include all relevant sections related to the product or service you’re billing for.
• Excel: An Excel invoice template is best for businesses that want to create tables and use automatic formulas when billing.
• Electronic invoicing: Instead of manual or paper invoicing, which can be tedious and tough to manage, electronic invoicing digitizes the invoicing process.

What to include on an invoice?

It can be difficult to keep track of all that should be included on an invoice. If you’re not sure where to start, use this list of some of the most important details every type of invoice should mention:

• The word “invoice”: You don’t want your client or customer to accidentally misinterpret your invoice for another type of document. Even if it seems self-explanatory, you should still include “invoice” on your bill.
• Invoice number: This is critical for tracking purposes. This number will help keep track of the invoice among all other invoices sent to the client as well as other clients.
• Service date: This is the date the service was performed. That's important for your buyer's accounting department so they can potentially recognise their payable. For example, if a service was performed in March but then you didn’t bill until April, then the customer may want to record that liability at the end of March for their accounting purposes.
• Date of sending the invoice: This is the date that the bill was created (and hopefully sent). The clock for payment starts ticking here.
• Name and contact details of the seller: This is your information, in case the customer needs to contact you with questions.
• Name and contact details of the customer or client: Include the specific name of the person this bill is going to along with their address. That's the person you're going to want to talk to if there's any problem.
• List of items and a short description: Include a detailed description of every item provided or service performed. As the seller, you need to make sure you're using consistent wording with the buyer's purchase order and your own quote/proposal. Your description should be explanatory enough so that your client has little reason to question all the great things your company does.
• Cost per unit of product/service: This amount should always agree to the buyer's purchase order and your quote/proposal.
• Tax rates: Generally, the amount of sales tax charged on the order. Keep in mind that tax laws on services performed vary by state and jurisdiction. Check with your local tax professional for more information.
• Total amount owed with currency: This is the sum of the total payment due. It's basically your favorite number on the document.
• Payment terms and conditions: Net 30 (due in 30 days) is the most common but maybe you'd like to do a 2% net 10, which means you're offering a two percent discount if you receive payment within ten days. This is a common practice and a helpful way to speed up cash flow.

Tip: Using an invoice template makes it easy for you to make sure you have included all the necessary elements to the invoice.

When to issue invoices?

Invoicing typically takes place after the item or service has been delivered. For instance, if you’re a marketing company hired to create an event flyer, you may send your invoice once the flyer is completed. On the other hand, if you’re a catering company providing food for a luncheon, you may either send your invoice after the luncheon is complete, or you may charge 50% upfront via an interim invoice with the final balance due upon completion of the event.

For large-scale projects and jobs that may take days, weeks, or more and/or require specific materials, businesses often consider a partial payment before the work begins, with the remaining balance due at completion. For more on how to send an invoice, read this.

As for invoice payment terms, this is a personal decision that depends on factors like the industry you’re in and/or whether or not you’re short on cash. Net 30 is generally one of the most common terms, but that doesn’t mean you can’t establish something different for your business, especially if you find yourself looking for tips to address a cash flow crunch. Learn more about invoice payment terms.

Most importantly, give customers an easy way to pay, which, in turn, may help you get paid faster. For instance, PayPal Invoicing can get businesses paid fast. In a recent study, 79% of PayPal invoices are paid within one day of sending the invoice¹. That’s much faster than traditional offline invoicing.

Importance of invoices

Beyond serving as a convenient way to help businesses get paid, many people opt to issue invoices to consumers in order to keep a thorough record of all their income and sales. Both self-employed workers and companies can use their invoices for record-keeping purposes.