To get paid for your products or services, you’ll almost certainly have to send an invoice that details the financial components of your business transaction. A properly created invoice will help your business get paid and will provide legal protection for both parties. Learning how to create an invoice for each of your customers while tracking outstanding and paid invoices may seem like a time-consuming task, but it’s an important part of running a business. In this post, we’ll provide valuable information on the different types of invoices, important elements to include and additional benefits of an invoice (other than getting paid).
Types of Invoices
There are many types of invoices that are used across industries. Below are the six most common to help you understand what’s right for your business and customers.
- Proposal or bid. This type of invoice helps a business communicate what they will charge for a job or project.
- Interim invoice. This is an invoice issued at regular intervals during a longer-term project; it takes place instead of sending one final invoice. Interim invoices can be used monthly, weekly, quarterly, etc. from the start of the project.
- Recurring invoice. This format is best for your customers that are on a retainer or are using your services continuously. There is no definite end to the contract.
- Miscellaneous invoice. A general invoice will work well for any job, contract or project that doesn’t fit a standardized service or product regularly provided by your business.
- Past due invoice. This acts as a notification when an account is past due. It includes outstanding costs for services provided, plus any accrued interest resulting in the unpaid balance.
- Final invoice. The final amount owed when a project is completed is formatted into a final invoice to the customer. If there were any interim invoices issued, it will include a record of those payments previously received.
How to Create an Invoice
Take a look at an example invoice here. Even though formats can change based on the type of invoice you’re creating, there are specific and important elements of an invoice that should be included in every invoice:
- (Section 1) The client’s name, address and contact person
- (Section 2) Your business name, address, phone number and email address
- (Section 3) Invoicing number for tracking purposes
- (Section 4) Purchase order number, if applicable
- (Section 5) Current date
- (Section 6) Itemized list of products of services performed, including hourly or per-item/project cost, dates of work, taxes and any other details
- (Section 7) Payment terms and acceptable methods of payment (for example, payable within 30 days via check, credit card, etc.)
Common Invoicing Mistakes
As a small business, especially one just starting out, you can’t afford to make mistakes on your invoices. Below are some common invoicing mistakes. Once you’re aware of them, they’re easy to fix or avoid.
- Not agreeing on terms. It’s critical to specify terms and provide a detailed breakdown of services and costs to help avoid any scope creep. It’s also important that the customer knows how much your services cost. Consider including a cost breakout of your services in the event that scope creep occurs so the customer understands the extra costs they would incur upfront.
- Waiting to invoice. Once you agree to the terms and the work is established, promptly send your invoice. Don’t wait for the customer to ask for the invoice — the responsibility for getting paid is yours. And the sooner you send that invoice, the sooner you get paid.
- Vague descriptions. It’s all about the details. Itemize your services and describe exactly what you executed. This will help your customers track, record and report expenses, too. Also, don’t forget to include a specific payment due date.
- Not making it easy to pay. Let your customers know how they can pay you: via bank transfer, online payments, check, credit card, etc. The easier it is to pay you, the faster it will happen.
- Poor formatting and errors. Double check that the dates are accurate, the invoice number is correct and there aren’t any spelling mistakes. Proofread your invoices before sending to your customer. Mistakes like this are more likely to happen when using Excel to create your invoices manually.
Invoices and Legal Rights
Invoices provide evidence that the products or services are delivered and establish a company’s right to payment. If a customer doesn’t pay, the invoice can be used as a contract that will legally demonstrate to a court of law that a payment is owed. The business can also keep copies of invoices and amounts paid to contractors to establish that the services have been rendered and payment is completed.
Invoices as Audit Evidence
There is always a possibility that your business could be audited by the IRS. By using invoices, you can provide all reported income you received throughout the year in review. Organizing your invoices sequentially will help the review process and give confidence that your business has reported everything fully and correctly.
Invoicing vs. Purchase Orders and Bills
There is a difference between all three. Invoices can sometimes be confused with purchase orders (POs), but POs happen before the transaction while invoices are sent after services are rendered. POs help record an order by a customer to a vendor or supplier, but an invoice acts more as a record of receipt. POs are often used as part of an approval process when getting vendors or suppliers involved.
A bill is more of a request for payment and is usually from a customer’s standpoint, whereas an invoice is created by a supplier. While an invoice is created before or after a product is received so the recipient can check off the items to ensure they are all there, a bill is usually given with the expectation of immediate payment.
There are many different types of invoicing software out there to help your business easily send and track invoices. Not only will the software save you time, but it will keep your invoices in one place, help you create presentable, consistent invoicing templates and more. Some more popular programs are Quickbooks, Freshbooks or Sighted. However, there are numerous options out there, so be sure to do your research to see what will work best for your business and customer base.
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