According to multiple research reports, on average, 61% of late payments are due to administrative problems such as incorrect invoices. Invoices & bills can reflect your professionalism and work as brand equity, helping you retain more customers. On the other hand, inaccurate invoices tend to confuse your customers, lowering their interest in doing business with you, and cause payment delays—ultimately affecting your cash flow. It’s important to understand how invoices work, the importance of invoices and ensure every element is captured accurately.
There are several ways to create an invoice. Many businesses use a document creation app like Microsoft Word or a spreadsheet to make invoices from scratch or use some pre-installed templates. Other businesses use invoice templates available online. However, these manual invoice creation methods may become challenging as the business grows, and dedicated invoicing software can help to streamline the entire process.
Online invoicing software helps you create professional invoices both in the office and on the go, and can significantly reduce the threat of human errors. With efficient online invoicing software, it takes a few clicks to send invoices online in a matter of seconds and collect payments by printing bank details or QR code details on the invoice itself. On the whole, from ensuring accurate billings to providing proper business management tools, online invoicing software has a lot to offer.
Invoices represent more than just a formal document that provides the information required to obtain payments from customers. They can help you project a professional image and stay updated during tax filing. Here are the top reasons why invoices are important:
Invoices record the incoming revenue to help track sales. They keep track of when a product was sold and how much money was made. This data is essential for maintaining accurate bookkeeping records, and for tallying sales and expenses it helps analyze metrics such as net profit, net margin, and yearly turnovers Furthermore, invoices help monitor payments due. As a seller, you can check which clients have invoices that remain unpaid or partially unpaid, and which invoices need following up. This way, you can not only keep an eye on your cash flow but also estimate future earnings.
What would you do if a customer falsely claimed that you did not deliver goods as promised? Or if a customer refused to pay for the services you provided? A professional invoice that serves as a legal document comes as a proof. Proper invoices can protect your business from irrelevant lawsuits. However, if you want the invoices to be legal documents, invoices must have a signature to be official. An invoice with all the required details signed by both the seller and the buyer is proof that both parties understood the business terms and agreed to abide by them. It acts as a reliable record of the transaction that establishes the seller’s right to payment.
Invoices back up the information you provide on your tax forms, and they serve as a reliable data source when audits are carried out. Tax filing becomes a hassle-free process in any country when you record and retain all your invoices. If your business maintains an organized record of its sales invoices, accurate tax filing and audit preparedness are simple.
Since invoices record the sales you’ve made, they contain key information such as unit prices of goods or services, the total amounts and dates of transactions that happened, and so on. These records help you gain insights into customers’ buying patterns, payment trends, peak buying periods, best-selling products, and much more. This aids you in tailoring your inventory by forecasting demand and developing effective campaigns to target the right customers with the right products at the right time.
Customizing your invoices helps boost your professional image. The colors, fonts, logo, and other branding components make the invoices look more professional and reflect the values that your business wants to represent to your customers. Ensure that the invoice design matches the elements and colors of the products you are selling, and other services, as it is crucial to maintain consistency within your customers..
Start the invoice with a professional header that includes the business name, business logo (if any), address, and contact information. After this, add the client’s business name, the name of the contact person, and their precise contact information. If your business collects sales tax, then include the business’s GST. For example, Indian businesses include GST numbers while making GST invoices/bills. If the business sending the invoice is a limited company, it’s best to add the company’s registration number.
Label the document with the word “Invoice” for the customer to identify it easily. Include a unique invoice ID number to track your transactions. The invoice ID is usually alphanumeric and includes specific information such as project name or date of invoice issue. Each business should choose an invoice numbering system that works for them and stick to it to avoid confusion. Add custom invoice fields according to the customer needs like transportation details, loan details. For example, for pharmacy shops, it's important to mention the doctor`s name to complete the invoice for the customer.
Include the date the goods/services are delivered (the supply date) and the date the invoice is issued, to establish a timeline and track payments.
The invoice should list all goods sold or services sold by the business in exchange for a price during that specific invoice period. Include each item sold, its quantity, rate per unit, and subtotal. For services, include the time spent for each line item and provide details for that specific service. This practice can help make your work and pricing more transparent and encourage faster payment. For instance, if you are invoicing for a hardware item you built, list the cost of all the boards and nails along with the time spent on the project. These details should be presented individually so that both you and your customers get clarity on the selling cost.
Payment terms specify when and how the business expects customers to pay them. This should include:
Include the tax details that apply to the sale, which vary depending on the country’s regulations, local tax rate, type of business, and other factors. Typically, when an invoice has multiple line items, the total tax liability is calculated for the final invoice amount and displayed at the bottom. You can split the tax amount according to the different tax groups the billable items fall under, instead of calculating the tax on each item. Once the tax and discounts (if any) are accounted into the calculation, tally up the sum and highlight the total amount owed by the customer.
Although invoices are self-explanatory, there are chances for confusion. For instance, customers might miss that you have applied a discounted price for one of your products. To prevent this, you can add an explanatory footnote about the discount so that customers understand that future invoices may show higher rates for the same product. Also, ensure you add any other applicable charges on your invoices, especially payment processing fees, and overdue penalty charges. You can also outline the conditions under which customers can return or exchange items they have purchased. For instance, you might state that your business will accept returns/replacements with a valid receipt for 30 days after purchase if the products returned do not have any signs of usage with packaging intact.
Timing plays a critical role when it comes to sending invoices. The best time to invoice a customer depends on the type of product or service you provide and how often you provide it. For instance, will you be issuing an invoice before or after the delivery, and on which day of the week will you be invoicing your client? Typically, sending invoices after the product or service is provided is the most common practice. However, many businesses adopt different practices when sending invoices. Here are the most common ones:
With this method, the invoices are sent to the customers before the sale or product delivery has been initiated. The amount quoted in the invoice could be a deposit, partial payment, or the entire amount. Once you send an invoice seeking advance payment and receive it, you will need to record the transaction. After the completion of the sale, the final invoice will reflect the advance already paid and display the remaining balance due. An advance payment confirms the customer’s commitment and offsets the possible loss to the business if the customer suddenly cancels the sale.
In this type of invoicing, a customer is invoiced after the completion of specific stages or milestones of a project. Each milestone represents a clear sequence of tasks that will eventually build up to fulfilling the contractual obligation. This invoicing practice can be used for expensive or a lot of products sold. For example, a wholesaler has sold 10000+ products to one of its retailers. To break up the payment & invoicing cycle, it broke down 3 milestones every 2 months basis., with each milestone priced for a different amount of products. An invoice is issued at each milestone.
This is the most commonly followed invoicing method. Businesses send invoices to the customers after the goods have been delivered or the services have been sold to their customers according to the agreement. The best practice is to notify customers first that the work is done from your end and verify all the details. Once you receive confirmation that your customers are satisfied, proceed with sending them a professional invoice to get paid.
If you are delivering services on a recurring basis to the same customer, then invoices are sent at fixed intervals according to the agreement. This is called recurring invoicing. For instance, if a customer orders the same three items from you every month, you can set up a recurring invoice for those three items that goes out each month on a particular date.