When you pour your heart and soul into your small business, you want to see a reward for your hard work. Yes, the satisfaction and support of your customers are rewarding, but we mean a reward in the form of hard-earned money. So, what is an invoice? Invoices are important financial forms that you’ll want to get familiar with because you’ll be filling out a lot of them. Understanding how to fill them out quickly and accurately will help you get paid faster.
What is the Definition of an Invoice?
Before sorting out the details of an invoice, let’s start with its most basic definition. An invoice is defined as an itemized list of goods, specified according to their individual price. It is like a bill (but hold tight, because it’s not quite a bill).
Invoices, also referred to as sales invoices, are sent by a business owner to a customer who received their product or service. Additionally, a business owner will receive an invoice from a vendor partner for services provided to the business.
Ultimately, it is a document that records a transaction between a buyer and a seller. When an invoice is created, it establishes an account receivable, or an obligation for a customer to pay a business. For a customer, it creates an account payable, or an obligation to pay the business for their services.
Why Should Your Business Care About Invoice Payments?
Invoices are vital to your small business for the following reasons:
- Inventory control
- Accurately filing business taxes
For accounting, invoices are used to keep track of sales and how many sales successfully received payment and how many are still outstanding. This helps your accountant balance your small business’s finances and understand where (and why!) there are gaps. Having physical documentation of payments and sales is also crucial if ever your business gets audited. Having organized documentation of invoices will help clearly explain to the IRS where your money came from.
So… What’s Not an Invoice?
People commonly refer to invoices by several other names. While it’s understandable, as the lines blur between an invoice and say, a bill, don’t fall into the trap. Clearly understand what it is and isn’t.
An invoice is not the following financial forms:
- A bill: This is sent to collect immediate payment. An invoice is used to document that the transaction occurred and, should it be the case, collect future payment.
- A purchase order: This is what you’d send to your vendor when you need more cups and lids for your local coffee shop, for example. An invoice is sent after the service or product has already been received.
- A receipt: Invoices come before the receipt. The receipt is what you’ll send to your customer after they’ve paid. This is to acknowledge that the order’s entire life cycle, from initial order to payment, was completed.
How to Create an Invoice
When you go to create an invoice for your customer, be sure to cover all the bases. Each that you create and send must have the following:
- The date, both of when you issued the invoice and when they must pay you by
- Contact information for both you and your customer
- Product or services you are charging your customer for
- Price of the product or service
- Terms of payment
- Invoice number
Note: when detailing the product or service that your customer is being charged for, you must enter each item on a separate line with its individual price. Then, at the bottom of the invoice, you’ll be able to add up the total amount due for all outstanding services and products. Doing this will help your customer understand what’s expected of them.
The terms of payment refer to the amount of time your customer has to fulfill the payment. Most commonly, you’ll see something like “Net 14” or “Net 30” noted on the invoice. This means that the client has 14 or 30 days from when the invoice was issued to pay. For the sake of your small business’s cash flow, you’ll want to aim to get paid as quickly as possible, so shoot for shorter payment terms if possible.
The invoice number is a unique number that helps you, the business owner, stay organized. These numbers will help you and your accountant keep track of your sales over the course of your time operating. Keeping your invoices numbered and organized in numerical order should you need to audit your sales for your business taxes.
Create an Invoice
There are three common ways of preparing an invoice. The traditional way is filling out a paper invoice. However, this is really the equivalent to a writer choosing to craft their life’s work on a typewriter rather than a laptop. It may seem like you’re extra dedicated to your business, but it ultimately isn’t the most streamlined and practical way to keep track of a high volume of sales.
There are great invoice templates and accounting software on the market that will minimize paper waste while helping you create beautiful and professional invoices. Our pick? Go digital. Mobile invoicing apps are the best way to fast-track the invoice making process so you can get paid faster (looking out for that cash flow, right?). NorthOne’s free invoice maker app is a free and easy way to crank out all the invoices you need and keep track of each one. With a mobile app, they can be created in minutes wherever you are.