It can be very boring and difficult for entrepreneurs and medium scale business owners to understand the proper use of invoices as it relates to their business success. As you have to deal with tons of financial records daily as your customer’s troop in.
Sending and receiving invoices are some of the key activities for every small and medium scale business that wants to maintain a proper business record.
In this in-depth guide, you will learn what an invoice is, how to create one, use it and also learn some very important tips on how to optimize your business cash flow for success.
Let’s get to it:
What is an invoice?
According to Investopedia, an invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If a customer purchased your goods or services on credit, you should specify the terms of the deal and provide information on the available methods of payment.
According to sharespace, 61 per cent of late payments are due to incorrect invoices.
Creating an error-free invoice should be one of your most important routines in the day to day running of your business.
What’s an invoice used for?
Although, the primary purpose of an invoice is to provide you and your clients a record of the sale. An invoice serves so many important purposes when it comes to small business accounting.
Other uses of invoice include:
· With an invoice, you can easily verify in writing the payment agreement between the customer and you. You don’t have to run helter-skelter swearing with every name you know under the heavens.
- With an invoice, you can easily verify in writing the payment agreement between the customer and you. You don’t have to run helter-skelter swearing with every name you know under the heavens.
- An invoice show’s your client’s obligation to pay you for your services or product.
- An invoice sets your payment terms and enables you to get paid faster for your services.
Different types of invoices for small business
The type of invoice you create for your business depends on your industry, your payment terms and how often you plan to get paid.
You can decide to get paid for your services/goods per item purchased, daily, weekly, monthly or even quarterly as long as it doesn’t restrict your cash flow.
Let’s talk more about the different types of invoices.
Types of invoice
Pro forma invoice
You will normally use this type of note if you are a service business owner because, most times, you do have to provide an estimated bill of your various services before you get started with the work.
A pro forma invoice provides the client with an estimated cost of the work to be completed. This type of invoice can be altered to show the real cost of the service/total job done.
A commercial invoice is a legal document between your supplier and you (the customer) that clearly describes the sold goods, and the amount due to you (the buyer)
You will normally use this type of invoice when you are shipping items into your city. The commercial invoice is one of the main documents used by customers in determining customs duties.
Here’s a template you can use for your commerce invoice ( link to template)
Some of the required information in a commercial invoice includes:
- Invoice information
- Shipper information (refers to the information about the sender of the goods)
- Consignee information (refers to the information about the receiver of the goods)
- Shipping information
- Shipment information (refers to the information about the goods to be shipped)
Handling multiple customers/clients at the same time is a lot of work. Meaning you are bound to make mistakes sometimes.
Credit notes are legal documents, just like invoices, that give you the important ability to cancel out an already issued invoice, either in full or in part.
Other reasons you might issue a credit note to your customer include:
- Your customer wasn’t happy with your service and you are giving them a full or partial refund.
- You overcharged your customers by mistake
- You issued an invoice by mistake and you are happy that your customer doesn’t have to pay.
Here’s a list of essential detail in a credit note:
Date of credit note issue
- Credit note number
- Customer reference number
- Payment terms
- Contact details
- Reason for issuing the credit note.
It’s a very good business practice to state at the top of the document that it is a credit note, not an invoice, to avoid unnecessary back and forth with your customer.
Offering a credit note is a healthy business practice as it allows you to delete the amount of the invoice from your financial records, without actually deleting the invoice itself.
Image of a timesheet invoice
Common among freelancers and creative gig workers, a timesheet is an invoice used when a business or employee is billing based on the number of hours worked and their standard rate of pay.
You decide to charge NGN3000 per hour for a service you offer for a total duration of 100 hours. The total on your invoice will read NGN 300,000.000.
The timesheet template in BIZ301 invoice will take away the stress of specifying work done and summing up the total number of hours worked.
This is the type of invoice you give to a client to collect advance payment (or retainer) for products sold or services rendered to them.
Retainer invoices remain a liability to your company until you deliver the said product or completed the service.
In other words, the complete money is earned when you deliver the product or complete the service to your client, else you will refund the advance payment to the customer.
If you are in the business of charging clients the same amount at a specific interval, then you will most likely use this type of invoice. Recurring invoice is common among firms offering IT business services.
For example, a digital marketing agency offering website development might offer clients a standard package per month. Cloud-based invoicing software let you automate the process of creating recurring invoices and allows you to repay the same invoice at a particular time and day you choose.
Why send invoices?
Using invoice, you make a record of all your sales for reference and bookkeeping purposes. It provides documentation of your business’s financial history while tracking all the revenue coming into your business allowing you to predict your profits & cash flow.
Invoice helps you track your sales record. It’s important you keep inventory for your business else how will you know when you’re making a profit or loss. You can set your own manual method of tracking payments using bill payment Software like BIZ301 invoice to automatically track both paid and unpaid invoices in real-time.
Image showing a tax office
In doing business in Nigeria or anywhere else, you come across petty customers who want to sue you for offences you never committed. Invoices help protect your business from false lawsuits because it provides details of your services, the timeline for completion and agreed total amount.
The invoice also serves as a legally binding agreement.
Easy tax filing
A lot of small and medium scale businesses get into a lot of trouble while working out their taxes. Many a time, you find it difficult calculating your tax so you end up paying higher tax fees.
Your sales invoices provide documentation that helps confirm your business inflow and outflow so you can file it as at when due. Cloud billing software like BIZ301 invoice allows you to file your tax as at when due.
The country’s local tax office recommends every small and medium scale business keep an appropriate record summarizing their daily financial transactions.
A manual invoice is great, but a digital invoice takes your business analytics and takes your business tracking to a whole new level.
Invoices help businesses track their sales and manage their finances, provide valuable data regarding how your sales change over time and tell you how good your business is doing.
Furthermore, invoice analytics tools like BIZ301 invoice empower you to make accurate business forecasts and tells you the average time it takes you to receive payment from your clients which can help you manage loans & cash flow.
When is the best time to send an invoice?
The best time to send out an invoice is immediately following the completion of a project or a sale. Except you have a different arrangement with your clients or customers or you are sending a different type of invoices like a credit note or pro forma invoice.
You don’t want to wait until the customer starts making excuses.
We found out at BIZ301 that invoice users who send invoices to their customer the same day that the job is completed as opposed to waiting for days are likely to get paid 2X quicker.
You can’t let your customers walk away without making some sort of commitment as to how they are going to pay you for your service or product sold.
Here’s a couple of mistakes you don’t want to make:
- Forgetting to invoice
- Having unclear terms
- Not following up on invoice
- Not signing the invoice
- Sending invoices to the wrong person or department
- Incorrect spelling
- Not backing up your invoice in the cloud
- Not sending a professional invoice
- Not branding your invoices
- Not providing multiple means of payment.
- Not stating clear payment terms
- Not using your invoice as a form of marketing.
Make all or any of these mistakes at your own peril.
Some of these mistakes can be avoided if you decide to use digital invoice software that automates all the above tasks for you.
While you can’t guarantee 100 per cent when sending invoices, using invoice payment software will help improve the efficiency of your invoicing workflow significantly.
What should an invoice include?
- the word invoice
- Date the invoice was issued and the date payment is due
- Invoice number
- Individual line items
- Date of service
- Total amount owed
- Payment instructions.
- Payment information
whose names are on an invoice?
You should include your company name or your name if you are the direct seller plus the name of the customer buying from you. The name of any other person whose part of the transaction should be included.
What’s an invoice product description?
An invoice description is a written note that specifies the service you have rendered to your customer or an itemize arrangement of items purchased.
You will save yourself from a whole lot of trouble if you get very descriptive about the service you’re offering or the product you’re selling to your customer.
A customer may often take a longer time to pay if they have to call your office to clarify the details of your invoice.
What’s a purchase order?
According to the corporate finance institute, a purchase order is a commercial source document that is issued by a business purchasing department when placing an order with its vendors or suppliers.
The document indicates the details on the items that are to be purchased, such as the types of goods, quantity and price.
A purchase order serves as a check for the invoices that need to be paid.
If your business requires you to purchase items from a large supplier, you will make use of purchase orders a lot.
A purchase order is different from an invoice.
Difference between a purchase order and an invoice
The purchase order is a document generated by the buyer and serves the purpose of ordering goods from the supplier.
While an invoice, on the other hand, is generated by the supplier to show how much the buyer needs to pay for goods bought from the supplier.
The PO is a contract of sale while the invoice is the confirmation of the sale.
Do you need to charge extra for Tax?
The amount you charge for taxes and the type of tax you pay depends on the country your business is located.
In Nigeria, some taxes are payable to the federal government and administered by the federal inland revenue service while some are payable to the state & local government.
Sales tax also known as Value Added Tax (VAT) is required to be collected by merchants in most states and paid to the state department of revenue. While some products or services like insurance, finance, education and training are exempted from this type of tax, sales tax from eligible products must be collected, paid and reported to the appropriate authority.
Does an invoice mean a customer has paid?
An invoice doesn’t mean a customer has paid for your service. It’s a payment demand issued by a seller to the buyer of goods or services. It details what goods have been provided, or what work has been done and how much must be paid in return.
Once a customer pays your invoice, a receipt is issued as proof of payment to the buyer.
How does an invoice get paid?
An invoice can be paid via in person or through electronic means.
In-office payment means you have to collect all your cash by hand which is a lot to deal with especially when you have to receive payment from multiple customers at the same time.
Allowing your customers to pay you via cloud invoicing services like BIZ301 invoice will enable you to automate your entire payment process giving you time to focus on other aspects of your business.
Do you have to pay an invoice immediately?
An invoice doesn’t have to be paid immediately except it has been confirmed and turned into a bill that must be paid.
Your customers do have the chance to argue an invoice that has been presented to them especially when there’s an error.
You can easily make an invoice within 5 min using BIZ301 invoice by following the instructions here. (link to the blog post)
Keeping accurate invoices and records is a major step for you if you want to do business right. Sure you can decide to do things manually, but as you know time is of the essence.
Digital invoice software will not only save you the cost of ink & paper but also from the headache that comes with cash collection, record filling, tax management, payment reminder, professional invoice design and much more.
Want to get started with sending invoices to your customers really fast? Start creating and sending invoices with BIZ301 invoice for free today.