What is an invoice and what does it include?

Why are invoices so important?

As a freelancer, entrepreneur or company, you will have to invoice your customers, no matter what your business is. If you don’t invoice your customers, you won't get paid. Without getting paid, you won’t have enough funds to stay in business. That being said, creating and tracking invoices should be given some extra attention for the sake of your cash flow.

From a buyer's perspective, an invoice spells out what the buyer is paying for. In addition, the document is used for bookkeeping purposes. This financial document is important in order to keep track of sales transactions. An invoice functions as evidence of the transaction for business taxation, as well as in case of any formal issues arising. 

So, what is an invoice?

An invoice is simply a bill of a sale. The document includes a description of the sold item(s), a breakdown of costs and payment details. The invoices come in many different forms and layouts. Such as paper-based, PDFs, e-invoices. Despite differences in the format, the content is more or less the same.

The Merriam-Webster Dictionary defines what is "invoice" as follows:

“An itemized list of goods shipped usually specifying the price and the terms of sale”.

The takeaway from the definition is that the terms of the sale should be included. The terms are for example due dates, delivery method, payment method, late payment consequences, and discounts.

Further, the Business Dictionary's definition is:

“A nonnegotiable commercial instrument issued by a seller to a buyer”.

The definition by the Business Dictionary tells us that an invoice is something from the seller to the buyer. From the seller's perspective, the sent document is described as a sales invoice. From the buyer's perspective the same, received document can be described as a purchase invoice. There are also tools fo invoice management process on both ends of the transaction, like Heeros Sales Invoices and Heeros Purchases Invoices.

An invoice is a demand for payment, but it is in itself not legally binding. If that would be the case, sellers could send bills with outrageous sums, and the buyer would be forced to pay. If, however, the sale is mutually agreed upon, the document is legally binding. This is why there often is a contract of a sales document to sign before the product or service is delivered. It is always recommended to make rates and expenses as clear as possible beforehand to avoid possible misunderstandings. Nonetheless, a verbal agreement counts as well in some jurisdictions, too.

By now, we know what an invoice is and that it contains information about a sales transaction. Moreover, there are some essential components that should be included in the document, and these are listed below.

What should an invoice include?

• The exact word ‘invoice’.
• Unique identifying invoice number. This will help you to keep your bills organized. You can start from a random number, e.g. 0035, alternatively, you can include the date as well; 08-12-2018-0035.
• Seller’s contact information. Seller's Name, seller's address, seller's company registration number, phone, and email.
• Buyer’s contact information. Buyer’s Name, buyer’s address, buyer’s company registration number, phone, and email.
• Dates. Issuing date, payment due date, and date of product delivery.
• Price breakdown. Price per unit and amount of units (line items). If you are invoicing for services rendered, state the hourly rate and number of hours spent on a job. Also, mention fees for e.g. shipping fees.
• Taxation. Percentage and total sum.
• Possible discounts. For example, early payment discounts.
• Total cost & total amount. You can mention this in bold for increased clarity.
• Payment method. For example, bank account number, and PayPal account details.
• Terms of sale. For example, late payment fees.
• Thank you message. This one is optional, but mentioning 'thank you' can actually increase the pay rate by 5% according to FreshBooks, so it is worth a try.

What is the difference between an invoice, bill, receipt, and purchase order?

Bill: Do not worry if you aren't sure of the difference between an invoice and a bill. Basically, they both refer to the same type of document. In fact, the distinction between the two words is merely a nuance difference, the word bill being more informal. Also, depending on the industry or situation, one might be more common than the other.

Sometimes it can be a matter of perspective. People tend to talk about an invoice more when being the issuer, and about a bill when being the paying part. Fundamentally, they mean the same thing. They are documents demanding payment for a service or product, specifying the price, and describing the product.

Purchase order: As previously mentioned, an invoice is sent by the seller to the buyer, requesting payment for a delivered product. On the other hand, a similar document from the buyer to the seller is called a purchase order. A purchase order is a document requesting and describing the desired products, specifying the amount and cost.

Receipt: Whereas an invoice is sent to the customer before payment, a receipt is sent to the customer after their payment is received. A receipt is proof of payment.

By now, the importance and meaning of an invoice are more clear. In the sections ahead, you can read about how to create one, and what to keep in mind when sending one.

How do you create an invoice?

In short, an invoice can in principle be written by hand, but obviously, it isn't the norm these days! To create one on your device, you can download free template and fill it out. These documents can be created in different formats, such as in Excel or Word. Make sure your file contains all essential data (see list above). Thereafter, you can save the completed template as a PDF file and deliver it to your customer by mail as a paper or email. In case you want to send the document in paper form, it is possible to use a printing service. Then you do not have to worry about printing and mailing yourself.

If you invoice more than about once a month, you should consider using financial management / invoicing software. With such software, you can quickly create invoices and follow up when they are viewed, due, and paid. The software will also give you an overview of all your finances. With Heeros PSA, invoicing, CRM and project management tool, it is easy and fast to create and follow up on your finances.

What else should you think about when creating and sending out your invoices to ensure a professional touch and smooth process? Keep reading to find out.

What is an invoice: Ideas and suggestions for creating and sending one

It can be good to think about the look and productivity of your invoices before sending one. Notably, a well-crafted document makes you look more professional and makes your customer pay faster. Be sure to make your process as smooth as possible.

Layout

Needless to say, the layout is important. First of all, it should be clear and easy to read: no spelling mistakes or unreadable fonts. If the content is hard to understand, the customer might want to check up the details later, instead of paying you on the spot. Bills are a part of your brand image as well, so customize it to look like you. You can use your logo and your brand's color to improve your branding.

Transparency

Another rule of thumb is to be as detailed as possible when breaking down the costs As a result, your customer will know exactly what they are paying for and will therefore probably be more satisfied. In order to make a fully transparent process; track the expenses of materials and working hours carefully to include them in the invoices you send.

Delivery

When you are ready to send, double-check that you have the right contact to send it to so that the delivery won’t be delayed because of the bills bouncing from desk to desk. Preferably it should be sent electronically straight to the receiver’s program. Further, send out your invoice as soon as possible when the project is completed, or the product is delivered. The quicker you send it, the quicker you will get paid! 

Due dates and reminders

The most usual time to give as the due date is 30 days. If you make the payment time longer or shorter, you will get paid later or sooner, accordingly. In case the payment is not registered yet in your bank, a couple of days after the due date, resend the invoice as a reminder (and maybe even with a reminder fee). You can easily send reminders straight from financial management software if you have one in place. Using the software, you can create and send e-invoices too to save time and effort.

What is invoice vs. e-invoice?

An electronic invoice (or e-invoice) is also an invoice that is handled completely electronically - from creation to payment. After reading different pages about what is e-invoicing on the internet, I realized it is not crystal clear what e-invoicing is exactly for a beginner. For example, a PDF invoice file sent through email is for sure created and processed electronically, but it is still NOT e-invoicing. E-invoicing is growing in popularity also due to European regulation on e-invoicing mandates. 

E-invoicing is done straight from your invoicing software to the accounts payable section in the customer financial management system or e-bank. The format has to be structured data so that the system is able to collect the information accurately. A PDF invoice file or a scanned document, on the other hand, contains unstructured data which has to be fed into the system manually. For instance, Heeros PSA's invoicing feature supports famous e-invoicing platforms such as Basware and Heeros financial management cloud that you can benefit from to automate whole your invoicing lifecycles.

Why e-invoicing?

Going digital is cheaper, more environmentally friendly, and more convenient. Hence, it is strongly recommended to send online e-invoices. In the long run, you will save your and your customer's time by utilizing e-invoicing. Compared to e-invoicing, it is unprofessional and ineffective to use and send invoice templates and email PDF documents to your customers. With specialized online invoicing software you can send bills straight from system to system, cutting out all unnecessary steps.

Today, e-invoicing through software is definitely the best and fastest way. Instead of having to fill in the information every time, you can use automatically generated data from the customer relationship management (CRM) feature of the same software.

The administration is facilitated as all related files are saved under the right client or project, too. Moreover, instead of having to remember what, when and whom to send, the software will remind you of all the details. Other cool features (depending on the vendor) include getting notified when the customer has viewed the bill and being able to automate recurring monthly ones. It is also much easier to customize the layout according to your liking and brand guidelines.

Find software that suits your business best. For example, you can try out Heeros PSA, a cloud-based invoicing software for SMBs and ready to integrate with accounting systems. The easy-to-use software is designed with the customer in mind. It helps you simplify work and focus on what you actually love - and you can try it out for free.