What is an Invoice? The Basics

n invoice is a key tool to ensure you are paid for the work you do. It's the standard, professional way to request a payment, and an essential document for any small business owner to understand. An invoice lays out the services or products provided, the price of those services or products, and any applicable taxes. In this guide, we'll go over the basics so you can confidently create and send invoices.

What is an invoice?

An invoice is an itemized document sent to a buyer once a seller has completed the agreed project or product. In a nutshell, an invoice concisely states the payment amount due, payment instructions, terms, and due date. For example, if you provide marketing services as a freelancer, you would send an invoice to the client to receive payment after completing your services. Or, if you outsourced marketing services for your business, you would be on the receiving end of an invoice to make payment.

What is the purpose of an invoice? 

The purpose of an invoice is to help both a buyer and seller document a sales transaction to collect payment for goods or services. Invoices help businesses of all sizes, from sole proprietors to corporations, stay organized and ensure they receive compensation for all of the duties performed and exchanged. 

When managing your business finances, invoices can help you keep track of incoming cash flow. Invoices also aid in the tax filing process to more clearly show the IRS where your business income is coming from.

What elements should you include in an invoice?

Every invoice contains multiple elements that collectively fulfill and document the agreement. An invoice includes an invoice number, date of services rendered, invoice due date, company names and addresses, contact information, an itemized list of services, sales tax, and payment terms.

Invoice number

An invoice number is extremely important in keeping your transitions and payments organized. This unique reference number is usually located in the top right corner, depending on the invoice template you use, and can be a combination of letters and numbers. Invoice numbers are particularly helpful if you have multiple transactions with a client or customer, enabling you to keep better track of work you’ve completed using recurring invoices. Additionally, if you happen to be audited, the IRS will look for invoicing inconsistencies as a sign you’ve been misreporting income.

Dates: invoice issue date, payment due date, and delivery date

There are two dates on an invoice: the date the invoice is generated, which informs the customer when the invoice was sent, and the payment due date, which indicates how long the customer has to complete the payment. 

Name and address of the buyer and seller

Both your name and your recipient’s company names and addresses should be included on the invoice. Even if you are sending an online invoice, it’s a standard formality to include the full postal address of the client. If for whatever reason, your client needs to send you a paper invoice, this streamlines the process by already exchanging the necessary information. There is also typically some form of business contact information, such as a phone number or email address.

Description of services or products

An itemized list of every product or service provided will be entered as a line item, ultimately showcasing where the amount due is derived from. Each item or service will be listed as its own separate line item with a price, description, and quantity. Each line item will be added to the total amount due at the bottom, including sales tax, if applicable.

Terms of payment

On an invoice, the terms of payment concretely lay out how the payee will fulfill the transaction, ultimately stating the amount of time a client has to complete a payment. Common terminology would be Net 30 (desired day amount), meaning the payment must be completed within thirty days of the invoice’s generation. 

Common Invoice Payment Terms:

Payment in advance (PIA): Asking for payment in advance requests payment of the invoice in full before work is started. 

Cash in advance (CIA): Asking for cash in advance requests clients to pay their invoices in full in cash.

Upon receipt: Asking for payment upon receipt means you do not expect payment until they receive the invoice.

‍Net X: When Net X is listed, you are requesting clients to pay X number of days after the invoice is received.

‍End of month (EOM): Asking for end-of-month requests clients to pay by the end of the month listed on the invoice date.

15 month following invoice (MFI): Asking for payment 15 MFI requests clients to pay by the 15th of the month following the invoice date.

2/10 Net 30: Indicating 2/10 Net 30 requests clients to pay within 30 days of the invoice date. However, if clients pay within 10 days, you will be granted a 2% discount on the total invoice amount.

50% Upfront: Requesting 50% upfront requires the client to pay half of the total invoice amount before you begin work. 

Invoicing with Novo

There are countless resources online that provide invoice templates for you to input your information and then download it as a PDF to send to the client. However, Novo’s free and customizable invoicing template enables you to manage your business finances on the go. With Novo, you can send electronic invoices, track them, and get paid on your terms. 

Novo invoicing features: 

• Create and send personalized and professional invoices in seconds
• Send an unlimited number of invoices free of charge
• Connect to our Stripe, Square, and PayPal integrations to get paid your way
• Accept ACH and check payments and avoid transaction fees

What are the different types of invoices?

There are different types of invoices: pro forma invoice, interim invoice, recurring invoice, credit invoice, debit invoice, past due invoice, or commercial invoice.

Pro forma invoice

A pro forma invoice is a document sent by the supplier to a buyer that is more of a formal quote or estimated price of the goods or services they are interested in purchasing. This type of invoice serves more as an informative courtesy to the client to provide a more comprehensive overview of the products and services, and it does not require any form of payment.

Interim invoice

An interim invoice is used for larger projects that are billed across multiple payments. These invoices will have payment terms that are accepted at a later date, meaning that you will receive invoices for partial payment based on the completion of specified deliverables. Interim invoices can provide a proactive way for businesses to manage cash flow effectively over more extensive time periods. This method will help you cover the costs associated with a project as work is completed, instead of waiting until the project is done.

Recurring invoice

Recurring invoices are issued to collect recurring payments from customers. For example, a vendor may issue recurring invoices to clients every month for services provided, especially if it is for the same amount. Using accounting or invoicing software for automated invoicing can be helpful in these instances to reduce the tedious efforts of creating and sending duplicate invoices. 

Credit invoice

A credit invoice is issued when a business needs to provide a customer with a refund or discount. For example, if you mistakenly overbilled a client for your services, you will issue a credit invoice for the amount that is redundant to the customer. 

Debit invoice

A debit invoice is issued when a business needs to increase the amount a client owes. For example, if you underbilled a client for services or products, the project required more time, or incurred more costs than anticipated, you would issue a debit invoice for the difference. 

Commercial invoice

Commercial invoices are customs legal documents for when a person or business is exporting goods internationally. The information listed in commercial invoices is used to calculate tariffs.

Past due invoice

A past due invoice is an unpaid invoice that has violated the payment terms, making it past due. You can do a few things as a business owner to help prevent past-due invoices. These include making the payment terms and amount due clear and concise, as well as offering a variety of payment options. Providing your invoice recipient with the luxury of pay-enabled invoices can simplify the payment process. Meaning customers can pay their bills directly from the online invoice. Another incentive to encourage prompt payments is enforcing late fees for late payments.

What is an invoice not?

There are a variety of other business forms that are similar to an invoice. However, there is a distinct difference. An invoice is not a purchase order, bill, receipt, or credit note. 

Purchase order

A purchase order is a document sent by a customer to a vendor requesting goods or services. Purchase orders are sent before an invoice is ever created. As a vendor, you would receive a purchase order, then fulfill the order, and then send the invoice to collect your payment.

Bill

A bill is a document sent or received to acquire immediate payment. For example, when you finish a meal at a restaurant, you are served with a bill for instant payment, not an invoice with terms. 

Receipt

An invoice is also not a receipt, being an itemized document of acknowledgment that the payment transaction has been completed. For example, if you outsource consulting services and pay your invoice, you will receive a receipt, or if you receive payment from a client, you will send them a receipt. 

Credit note

A credit note is a document sent out following an invoice when a sale or order needs to be canceled or adjusted. 

Legally binding document

Invoices are not legally binding documents. However, they do contain proof that a business and its customer have agreed on terms of payment in the exchange of goods or services. To reduce any confusion or chances of a disputed invoice, many business owners create contracts that outline the terms of the project and overall agreement, which is then signed by both parties to act as a legal document. 

‍

This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.