An invoice serves as a document to detail goods delivered or services provided by a supplier to a buyer. However, beyond a simple record, an invoice contains a wealth of information including payment terms, legal agreements, and more. Invoices are a key piece of documentation for any business and help protect against legal and audit difficulties. At the same time, when collected as part of a holistic data management strategy, effective and well-developed billing supports data analysis that contributes to strategic decision making.
What is an invoice?
An invoice is like the receipt you receive after buying groceries or changing your oil, but in a different order and much more complex. While you receive a purchase receipt after payment, you will send or receive an invoice before you pay or receive payment. Like receipts, invoices also record a financial transaction between a buyer and seller.
So what is an invoice and how is it different 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 analysis strategy.
- A way to make your business audit-proof.
- Facilitation of tax filing.
- Terms and conditions detailing the payment methodology.
- Much more, depending on the circumstances of your business.
Simply put: an invoice is an official, legally supported record of transactions between a buyer and a seller, with comprehensive details that ensure a common understanding between both parties, legal standing in the event of a dispute, and serves as documentation to support the analytical efforts, protect against poor audit results, and simpler tax peak time.
What are the types of invoices?
When you manage, send or receive invoices, they will typically be of four types:
- Sales invoice: The most common type, a bill of sale, is usually what you think of when you hear the term. Unlike a sales receipt, a sales invoice includes detailed information about both parties, pricing information, payment information, and more. Additionally, once money changes hands and the invoice is signed, the document serves as a legal tool in case of a dispute.
- Proforma invoice: A pro forma invoice is essentially like a preliminary sales invoice: it gives the buyer an estimated delivery date and cost quote before proceeding with work or shipping the item. A pro forma invoice allows the buyer to ask questions and understand costs before committing.
- Recurring invoice: If you have an ongoing buyer/seller relationship with goods delivered or services provided on a regular but ongoing basis, manually generating and approving an invoice each time is wasteful. Instead, you'll probably use a recurring invoice. This type of invoice is sent before the deliverables of the next cycle (i.e. monthly, quarterly, or annual) and must be paid before the transaction is executed. This is kind of like a streaming video subscription: if you receive a bill in the mail from Netflix on December 31street for your January 15th monthly renewal but you don't pay, you lose access.
- Timesheet invoice: If you work with a service company, such as consultants or outsourced accounting services, your provider will record your employees' time during each period and consolidate the total into a timesheet invoice. This invoice will include the hourly rate per employee, the total hours worked, what the employees worked on (a short reference note is usually sufficient), and any administrative fees you have agreed to in the contract.
Other types of invoices in accounting include:
- Overdue bill
- Consolidated invoice
- Advance and provisional invoices
- Credit and debit notes
- Commercial invoice (used in cross-border transactions for customs)
What is an invoice like?
There are many invoice templates available and all can be customized to your specific needs. This is an example of what invoices typically look like: detailing the date, parties to the transaction, goods/services provided, payment information and any additional details required.
What is the purpose of an invoice?
In essence, an invoice fulfills all the standard functions of a receipt, but offers additional benefits to both buyers and sellers.
Document and record management.
When you transact as a business, you are required by law to maintain strict accounting of all purchases and sales. Effective billing means you're protected from audits or legal action, and quality record management makes filing taxes much easier each year.
Billing is not only part of required records management, but maintaining control of your documentation is a sign of the overall health of the business. If you can't do the little things right, you'll never do the big things right, and billing is one of those little things that represents the overall effectiveness of your organization.
Payment tracking and data analysis
A central function of account reconciliation includes invoice management – without invoicing, you will not be able to match transactions between purchase orders and confirmation of receipt of goods effectively. The invoice is also the third leg of the triple check and a central function of accounting practices such as invoice comparison.
At the same time, if you are juggling many vendors and suppliers, you will need to monitor cash outflow and how much you owe to whom. Well-organized invoicing helps maintain balance across your entire payment landscape, ensuring you maintain a quality relationship between your business and your suppliers.
If you have developed enough depth in billing invoices, documentation can also serve as an effective information feeder for data analysis, especially if you are on the supplier side. Billing helps determine purchasing trends, business cycles, and more to help inform your marketing strategy. From a procurement perspective, effective invoice analysis also helps reduce costs and identify waste or inefficiencies.
Legal protection
While effective invoices help protect against audit or tax issues, they are also a tool in your legal arsenal. Since signed invoices are part of contractual agreements and procedures, you can use invoicing to ensure that you pay the agreed upon price for goods or services or that you receive proper payment as a supplier. This can help protect against frivolous lawsuits or serve as evidence if you are forced to go to the court system to demand payment.
What details does an invoice contain?
Although the form may vary between sectors and companies, the function does not. It will usually include most, if not all, of these main details:
- Invoice number to efficiently file and track invoices and payments throughout your company.
- Date services were provided or goods were delivered (or projections in the case of a pro forma invoice), as well as the date the invoice was prepared and sent.
- Buyer and seller contact information.
- Any applicable terms and conditions, i.e. payment on net 30 terms, dispute clauses, etc.
- Detailed information for each good delivered or service provided along with the price of that specific line item, whether as a unit price or charged collectively.
- Any applicable tax.
- Total information owed and currency if a international transaction.
- Any additional personalized memos, notes or messages for the recipient.
When should I send invoices?
There is 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 it comes to B2B or B2C services that have significant legal ramifications.
While the specific needs of your business drive time, it is good practice to send a pro forma invoice after digesting the client's requirements to ensure you are on the same page and send the sales invoice quickly upon confirmation of receipt or when the services have been fully provided. Ex post billing is called billing at the time of delivery.
If you are working with a new client or the contract is particularly large, you may also want to send a preliminary invoice before starting work to secure a down payment. Is called advanced billing. Likewise, if the contract is long, a mid-term invoice or an invoice against established, predetermined milestones can help ensure that you are both on track with the billed time and budget.
Invoices and internal controls
Invoices are a fundamental part of three-way agreement and are therefore essential for effective management. internal accounts payable controls. Tracking the flow of invoices throughout their journey helps ensure that products are ordered in a timely manner according to the agreed upon cost while protecting you against employee fraud or non-compliant spending.
Inside accounts payable or receivableDepending on your role as a buyer or supplier, the invoice also helps manage your credit account as it is received before payment. From a sales perspective, invoicing also helps you monitor your inventory levels or staffing needs if you run a service-based business.
Conclusion
Invoicing is not complex in and of itself, but depending on the size and scope of your business, you can quickly become overwhelmed juggling many invoices and ensuring payment is sent (or received) in a timely and correct manner.
Today, invoicing is undergoing rapid changes as digitalization and cross-border transactions become the norm. A multitude of Automated AP and billing software helps users automate their invoicing process, including custom templates to quickly deliver invoices to buyers and streamline accounts payable and invoice approval workflows when performing account reconciliation or procurement processes.
Since next-generation invoicing platforms are fully digital, you'll also save money by reducing staffing requirements and allowing employees to focus on improving the positioning of your business instead of having to work with reams of manual data. If you send or receive physical invoices, many platforms also offer optical character recognition (OCR), a technology that automatically completes digital text and information scanned from physical documents.
Remember, doing the little things right is the foundation of effective management, and keeping tight control of your billing process is one of those easy wins that sets your organization up for success.
