What is an invoice – Simple guide for business owners
Tips / 08.09.2021
As a small business owner who’s just starting out or a freelancer who is about to spread their wings and fly, it’s important to have a firm grasp on all aspects of your business. Payments included.
This is due to the fact they are going to be the fuel that keeps your business going. One aspect of payments, and not really a fun one, is invoicing.
So, if you’re wondering what an invoice is, why it is important and how you should apply this important document to your business, you’ve come to the right place.
Table of Contents
First things first—let’s start with what an invoice is. Essentially, it is a document, whether in print or digital format (which manifests itself as electronic invoices).
It contains a set of specific characteristics which enable a seller to specify the items or services that they have sold, at which price, with a due date for the payment. The merchant sends it to a customer so that they can get paid for these items.
Merchants often use invoicing software or accounting software to prepare their invoices. Some invoice software allows for the automatic creation and sending of invoices, helping to save time and reduce efforts in a business’ overall payment process.
How does an invoice work?
Unlike a bill that you receive at a restaurant or at a grocery store, an invoice is different, with more details and different terms for payment.
First, the business in question ensures that the customer receives the relevant set of goods or services, sets out the payment amount and terms that need to be fulfilled and sets the due date for the payment.
You can send invoices via email, post, fax, or any other communication method that you may have available at your disposal.
Invoices are sent for both domestic and international transactions, facilitating the trade of goods and services across borders.
Why is invoicing required?
Invoicing is required because it serves as a legal document that indicates that goods or services were actually delivered and that the amount on the invoice is owed or has been paid.
Money is still owing? You, as a merchant, can issue a claim against the customer based on the unpaid amount in a court of law to seek redress and receive the payment that’s due.
If an invoice has been paid, it can serve as proof of payment that goods have been delivered or that merchants have rendered services, thereby reducing liability for a claim against them for undelivered goods or services.
Invoices and accounts payable
Invoices are closely linked to a business’ account payable expectations. When you have sent out a series of invoices, you know which dates money is expected to flow into your business. This can help you manage your cash flow much better.
Invoice and internal controls
Invoicing is also required for a business’ internal controls. Apart from giving you instant visibility into how much funds your business is expecting to receive on any given day, you can also better manage your invoices by reference number, carry out stronger and more accurate reconciliations and overall, help your business stay in the black when doing your accounts.
How can you use one?
The invoicing process is a means of recording a service provided or a product sold legally. It enablesbetter tracking, analytics, and reporting, as well as ensuring that a business can undertake a historical analysis to predict or expect projected future sales.
Depending on the type of invoice you choose to use for your business, you can use invoices for managing expected funds, handling your books in a more organised manner and ensuring you have a paper trail of all anticipated payments. That way you have recourse to action in the event of an unpaid invoice.
What are the key features of an invoice?
Now that you know how to use it, it’s also important to know what an invoice looks like.
![How does an invoice looks like](https://i1.wp.com/blog.mypos.eu/wp-content/uploads/2021/09/invoice-example.jpg?w=750&ssl=1)
While different invoice types have different defining characteristics, most invoices feature the following standard information to ensure consistency and uniformity in sending bills for goods or services rendered.
Therefore, a professional invoice will feature the following information:
- It needs to indicate what type of document it is, namely an invoice;
- The issue date or invoice date;
- Some form of identification number, usually called an invoice number;
- The merchant’s VAT number;
- The customer’s VAT number (if applicable);
- The customer’s full name and address;
- The quantity and type of goods which were supplied or services rendered;
- The date when goods/services were supplied;
- The payment date;
- Taxable amounts;
- The applicable VAT rate;
- The VAT amount payable;
- Discounts, if these are applicable;
- Early payment discounts;
- Partial payments or specific payment terms;
- Shipping costs and terms, if applicable;
- Payment terms, such as cash, card, bank transfer or other;
- Unit costs;
- Any other terms that may have been agreed upon during the transaction.
When presented together, the criteria above and all the details mentioned not only form the basis of legal documents but also ensure timely payments and even advance payments if you offer incentives in this regard.
What types of invoices are there?
There are several types of invoices, each used for a specific purpose. Here are 5 most common ones and the ways in which these invoices differ from each other.
Standard invoices
This type of sales invoice notes the sale between the merchant and the customer. It requires payment to be made on a certain date and is the most common type of invoice on the market, used by most business owners.
Commercial invoices
Usually used for international shipments, it is generally a requirement by customs officials and contains a cost description that is relatively detailed. Remember that every shipment in EU and UK customs procedures must also contain an EORI number.
Payments made on the basis of commercial invoices usually set out detailed payment terms, which relate to when and where an item is delivered, if insurance is involved and how much and other defining characteristics. These may include how much cash up front needs to be paid before the final handover of the goods.
Recurring invoices
As the name implies, recurring invoicing involves an invoice that is usually sent to a customer for goods or services delivered on a regular basis. These invoices typically provide for recurring payments. Subscriptions are good examples of these invoice types and can be sent out on a weekly, bi-weekly, monthly or annual basis, depending on the payment plan the customer has chosen.
Pro forma invoices
A pro forma invoice is a “bill of sale” that is sent before delivery or shipment. It will typically include the delivery items, shipping weight, and transport charges, excluding the cross-border fees for sellers.
These types of payable invoices are generally used for international shipments and can serve in front of customs. Its terms of sale can usually be subject to change.
VAT invoices
Merchants typically use these invoices when a merchant wishes to charge VAT on a sale or when they seek to reclaim the VAT charged on the goods or services that are purchased by a customer.
These usually only apply to businesses that are VAT registered.
E-invoicing
Merchants who seek to request payment from their customers can also do so via e-invoices, which are considered a final invoice for services delivered. Created automatically through specific invoicing or accounting software, electronic invoicing is a streamlined way to control a business’ incoming funds through internal controls invoices.
What are the legal impacts of an invoice?
The submission of an invoice is a request for payment to be made by a certain date. It has legal ramifications, as a merchant can sue a customer for an unpaid product or service.
It is also possible for the merchant to charge interest on late payments and claim such payments through legal means.
In addition, invoices are important for auditing as well as accounting reasons.
How to send an invoice
One way is to create an invoice from scratch each time you need to bill a customer. Another way is to create a template which will be consistently used and applied to all future invoices.
However, the two points just mentioned can be time-consuming and can cause chaos rather than help you stay organised.
Therefore, myPOS has developed a value-added invoicing service to help you stay on top of your needs and keep your business “in cadence”. With myPOS Invoicing, you can let your customers pay you directly and instantly online via card or by bank transfer.
Some of the benefits you can enjoy with this service include:
- Customise your invoices with your logo and brand colours;
- Automatically calculate taxes and discounts;
- Track status in real-time and get instant notifications.
The best part? You can choose from three payment plans: Free, Annual Unlimited plan, or Monthly Unlimited Plan. This is ideal for your business as you can choose the most affordable plan to suit your needs best.
Managing customer orders and creating invoices has never been easier
![How to issue and send an invoice](https://i1.wp.com/blog.mypos.eu/wp-content/uploads/2021/09/sending-an-invoice.jpg?w=750&ssl=1)
Conclusion
As mentioned above, creating an actual invoice is not exactly the most exciting part of doing business, but it’s quite necessary if you would like to keep track of all your payments due and comply with the law.
There are several types of invoices that you can send, but the fundamental characteristics remain the same. Ultimately, this is a document that records when a payment is due in the future, how much is owed, for what and by whom.
If you’re struggling to navigate the world of invoicing, let myPOS help ease this pain point for you! With the invoicing service described above, you can quickly and smoothly create and send your invoices, allowing your customers to pay you in convenient ways.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.