What Is an Invoice?

Congratulations — after months spent developing a relationship with a customer, they signed the deal and you fulfilled their order. There’s just one last step to complete: getting paid.

What is an invoice? It’s a crucial, and often time-consuming, part of the sales process. But you can make it a more pleasant experience, and get paid faster, with a few key tips and the right tools. If you’re new to working with invoices, we’ll break down what they are, how to use them as part of your workflow, and how software can help save you time and effort.

An invoice is an accounting document that records and itemizes a transaction. Businesses send invoices to notify buyers that payment is due. Usually, the order has already been fulfilled when the invoice is sent. It serves as a record of the sale and payment request. Because it's an official document, it's often used for financial reporting and taxation.

The invoice is sent to the buyer after the order is complete. Invoices notify the buyer of payment terms to help ensure timely payment.

The seller creates an invoice. This document can be sent digitally or old-school (by mail).

A bill is a document that shows what a customer owes for goods or services. An invoice provides extra details about payment terms and upgrades, such as support services and warranties, that a bill doesn't. Bills are usually associated with consumer products, while invoices are more often used in business-to-business (B2B) sales.

For example, if you order a steak at a restaurant, you'll be given a bill that needs to be paid immediately. But if you hire a graphic design agency to create a company logo, you'll be sent an invoice to be paid at a later time.

Actually, it’s the opposite. When you receive an invoice from a company, the company is requesting payment for a product or service. Typically, you receive the invoice after receiving the product but before making payment.

The main purpose of an invoice is to request payment. It's a way to make the transaction details clear, such as what was provided, how to pay, and when payment is due. Invoices can also serve as a record of revenue and taxes collected.

Organizations that use invoices often have the following benefits:

• Helps track payments: Every invoice contains a unique number so you can track each payment. This makes it easier to reconcile your books, ensure all payments have been collected, and follow up on late or missed payments.
• Reduces payment issues: Sending a formal payment request with the due date increases the chances of timely payment. Since the document clearly states the terms, such as amount and accepted payment methods, invoices also help prevent payment errors that could delay the process.
• Improves revenue tracking: Organizations need to precisely know how much revenue is currently outstanding for accurate forecasting. Invoices make it easier to track which payments are pending, completed, or overdue. By using sales analytics software, organizations can more accurately manage budgets, cash flow, and expenses.
• Streamlines record keeping: Because invoices are legal documents, businesses use them to maintain an accurate record of transactions. This helps simplify the calculation and documentation of sales tax or value-added tax (VAT). Additionally, invoices create a paper trail for both internal and external audits.
• Improves client relationships: The invoice outlines all the terms of the sale and payment. Since the buyer has all the information in one place, it reduces the chance of communication errors. Plus, the buyer saves time by not having to ask questions about the payment. This leads to a more satisfied customer.

The more detailed and specific you can make your invoice, the faster you can get paid. For example, if you incorrectly itemize an invoice or forget to include a payment due date, payments can be significantly delayed.

Here are key things to include on an invoice to ensure the process runs smoothly:

This is the date the invoice was created. It's important to include the date of issue as well as the payment terms, so customers know when their payment is due.

You should include the name and address of your company, a contact person's name, email address, and telephone numbers for both you and your customer.

Every invoice should have a unique number to track payment. Typically, invoice numbers are numerical, such as 001.

By including details about the products and the quantity purchased, you provide a record of the order for you and your customer. Be sure to also include product numbers or stock keeping units (SKUs) if you use them for inventory purposes.

If installment payments are available, detail this information on the invoice. Common payment terms are net 30, 60, or 90. The number refers to the number of days after the invoice is received that payment is due. For example, a net 30 invoice issued on April 1 is due on May 1. Additionally, include any late charges and acceptable payment methods.

Include the total amount due so the buyer understands exactly how much is owed. If taxes are applicable, be sure to include the pre-tax amount, taxes due, and total amount to make tax records simpler.

State the date the invoice is due to ensure timely payment and establish when any late fees will start to apply.

In addition to the standard invoice described above, businesses can create other types that meet specific needs. Here are the three most common ones:

Buyers often want to know the cost of a product or service before agreeing to purchase. A pro forma invoice details the estimated cost and clearly defines the scope of the project. Because it's not a final document, the buyer or seller can adjust the terms and scope.

For example, a retailer purchasing servers for their on-site data center wants to make sure all terms, such as installation and support, are approved by upper management. A pro forma invoice will detail all the specifics in writing, so the buyer can get approval from higher-ups before going forward with the purchase.

For lengthy projects — such as ongoing services or projects that require materials up front — sellers often use interim invoices. These are used to collect partial payment of the total amount due. While some money may be requested up front, the full amount will typically not be paid off until the job is complete.

For example, a fast food company has hired a construction company to remodel its dining room. The construction company sends an interim invoice at the start of the job to collect payment for the materials needed to begin work.

Companies that sell recurring services, such as subscription packages or gym memberships that renew monthly, typically use recurring invoices to collect payment. For example, at the end of each month or billing cycle, a customer will receive an invoice to continue their streaming service.

Creating an invoice is easy to do as part of your revenue lifecycle management. Establish a standardized process by following these five steps:

1. Use invoicing software to build an invoice template that includes all the key sections listed above.
2. Make sure your document is clear and easy to understand. When possible, try to keep it to a single page.
3. Have internal stakeholders, including sales, finance, and legal, review the template.
4. Customize the template for each customer or sale, with specific contact information and terms.
5. When you send the invoice, copy all stakeholders involved, especially the sales rep and finance department. This keeps your team in the loop and documents when it was issued. While most companies send them by email, occasionally a buyer may request a hard copy.

Creating an invoice can be simple, but organizations can encounter common pitfalls that complicate the sales process. Here are some best practices for invoices: