What is an Invoice?
An invoice serves as a document to detail goods delivered or services rendered from a vendor to a buyer. Beyond a simple log, though, an invoice holds a host of information that includes payment terms, legal agreements, and more. Invoices are a key piece of documentation for any business and help protect against audit and legal difficulties. At the same time, when collected as part of a holistic data management strategy, effective and well-developed invoicing supports data analytics that contribute to strategic decision-making.
What is an Invoice?
An Invoice is a vital commercial document issued by a seller to a buyer with the purpose of requesting payment. It presents an itemized summary detailing the products or services provided, along with the corresponding amounts due. Besides serving as a payment request, an invoice also functions as a legal record of the transaction. Understanding the components of an invoice, including the itemized details and payment terms, is crucial for transparent and accountable financial transactions between buyers and sellers.
So, what is an invoice and how does it differ from a receipt? An invoice does all of the above but also offers:
- Strict legal protection when done correctly.
- Useful data points to help inform a broader analytics strategy.
- A way to audit-proof your business.
- Tax filing facilitation.
- Terms and conditions detailing payment methodology.
- Much more, depending on your business’s circumstances.
Bottom line – an invoice is an official, legally-supported transaction log between a buyer and seller with exhaustive detail that ensures common understanding between both parties, legal standing in the event of a dispute, and serves as documentation to support analytic endeavours, shield against poor audit outcomes, and max tax time simpler.
What are the Types of Invoices?
When you’re managing, sending, or receiving invoices, they’ll typically be one of four types:
- Sales invoice: The most common type, a sales invoice, is usually what you think of when you hear the term. Unlike a sales receipt, a sales invoice includes detailed info about both parties, pricing information, payment information, and more. Plus, once money changes hands and the invoice is signed, the document serves as a legal tool in the event of a dispute.
- Pro forma invoice: A pro forma invoice is essentially like a preliminary sales invoice – it offers the buyer an estimated delivery date and cost quote before proceeding with the work or sending the item. A pro forma invoice allows the buyer to ask questions and understand the costs before committing.
- Recurring invoice: If you’re in an ongoing buyer/seller relationship with goods delivered or services rendered on a periodic but ongoing basis, manually generating and approving an invoice each time is wasteful. Instead, you’ll likely use a recurring invoice. This type of invoice gets sent before the next cycle’s deliverables (i.e., monthly, quarterly, or annually) and needs to be paid before the transaction executes. This is kind of like a streaming video subscription – if you get a bill in the mail for Netflix on December 31st for your January 15th monthly renewal but don’t pay, you lose access.
- Timesheet invoice: If you work with a service-based firm, like consultants or outsourced bookkeeping services, your vendor will log their employees’ time throughout each period and consolidate the total on a timesheet invoice. This invoice will include the hourly rate per employee, total hours worked, what the employees worked on (a brief reference memo usually suffices), and whatever admin fees you agreed to within the contract.
Other types of invoices in accounting include:
- Overdue invoice
- Consolidated invoice
- Retainer and interim invoices
- Credit and debit memos
- Commercial invoice (used in cross-border transactions for customs)
What Does an Invoice Look Like?
Many invoice templates are available, and they’re all customizable according to your unique needs. Here’s one example of what invoices typically look like – it details date, parties to the transaction, goods/services rendered, payment information, and any additional details required.
What is the Purpose of an Invoice?
At its core, an invoice fulfills all standard functions of a receipt but offers additional benefits to both buyers and sellers.
Document and record management
When you’re executing transactions as a business, you’re legally required to maintain strict accounting for all purchases and sales. Effectively invoicing means you’re protected from audit or legal pursuit, and quality records management makes tax filing much simpler each year.
Not only is invoicing part of required records management, but keeping control of your documentation is a sign of overall business health. If you can’t do the little things right, you’ll never do the big things correctly – and invoicing is one of those little things that represent your overall organizational effectiveness.
Payment Tracking and Data Analytics
A core function of account reconciliation includes invoice management – without invoicing, you won’t be able to match transactions between purchase orders and goods receipt confirmation effectively. The invoice is also the third leg of 3-way matching and a core function of accounting practices like invoice matching.
At the same time, if you’re juggling many vendors and suppliers, you’ll need to keep tabs on cash outflow and how much you owe to whom. Well-organized invoicing helps maintain equilibrium across your payment landscape, ensuring you maintain a quality relationship between your business and vendors.
If you’ve developed a sufficient invoice billing depth, the documentation can also serve as effective feeder information for data analytics, particularly if you’re on the vendor side. Invoicing helps determine buying trends, business cycles, and more to help inform your marketing strategy. From the procurement side, effective invoice analysis also helps cut costs and identify waste or inefficiencies.
While effective invoices help shield against audit or tax concerns, they’re also a tool in your legal arsenal. Since signed invoices are part of contract agreements and proceedings, you can use invoicing to ensure you’re paying the agreed-upon price for goods or services or getting paid properly as a vendor. This can help protect against frivolous lawsuits or serve as an exhibit if you’re forced into the court system to compel payment.
Read More: The Guide to Invoice Audits
What Details Does an Invoice Contain?
While form might vary across sectors and businesses, function doesn’t. You’ll usually include most, if not all, of these core details:
- Invoice number to effectively file and track invoices and payments across your enterprise.
- Date services were rendered or goods delivered (or projections in the case of a pro forma invoice), as well as the date the invoice was prepared and sent.
- Contact information for buyer and seller.
- Any applicable terms and conditions, i.e., payment on net-30 terms, any dispute clauses, etc.
- Detailed information for each good delivered or service rendered alongside pricing for that specific line item, whether as a per-unit price or collectively charged.
- Any applicable taxes.
- Total owed and currency information if it’s an international transaction.
- Any additional memo, note, or personalized message to the recipient.
When Should You Send Invoices?
There’s no “best time” to send an invoice, but a good rule of thumb is early and often. Communication is key in all aspects of life, but particularly when engaged in B2B or B2C services that have hefty legal ramifications.
While your specific business needs drive timing, it’s good practice to send a pro forma invoice after digesting client requirements to ensure you’re on the same page and send the sales invoice quickly upon receipt confirmation or when services are fully rendered. Invoicing after the fact is called invoicing on delivery.
If you’re working with a new client or the contract is particularly large, you may also want to send a preliminary invoice prior to beginning work to secure a down payment. This is called advanced invoicing. Likewise, if the contract is lengthy, a mid-period invoice or invoice according to set, pre-determined milestones can help ensure you’re both on track regarding billed time and budget.
Invoices and Internal Controls
Invoices are a core part of 3-way matching and thus critical to effective accounts payable internal controls. Tracking invoice flow along its path helps ensure you’re getting goods ordered in a timely manner according to the agreed-upon cost while protecting against employee fraud or maverick spending.
Within accounts payable or receivable, depending on your role as the buyer or vendor, the invoice also helps manage your credit account since it’s received prior to payment. From a sales perspective, invoicing also helps you keep tabs on your inventory levels or staffing requirements if you’re a service-based business.
Invoicing isn’t complex in and of itself but, depending on your company’s size and scope, you can quickly become overwhelmed juggling many invoices and ensuring payment is sent (or received) in a timely and correct manner.
Today, invoicing is seeing rapid change as digitization and cross-border transacting become the norm. A multitude of automated AP and invoicing software helps users automate their invoice process, including customized templates to quickly deliver invoices to buyers and streamline accounts payable and invoice approval workflows when executing account reconciliation or procurement processes.
Since next-gen invoicing platforms are wholly digital, you’ll also save money by reducing staffing requirements and letting employees focus on improving your business positioning rather than slogging through reams of manual data. If you do send or receive physical invoices, many platforms also offer optical character recognition (OCR), a technology that automatically populates digital text and information scanned from physical documents.
Remember, doing the small things correctly is a foundation of effective management – and keeping a tight lid on your invoicing process is one of those easy wins that sets your organization up for success.