This article is written by our friends at <a href= https://www.freshbooks.com/pages/bench?utm_campaign=ext-bench-blog&utm_content=what-is-an-invoice&utm_medium=website&utm_source=externalutm_term=freshbooks rel=“follow”>FreshBooks.
What is an invoice?
An invoice is what you send a client after you’ve delivered your product, but before you get paid. The invoice tells your client how much they need to pay you, and sets the payment terms they need to follow. Sellers sometimes call it a “sales invoice.”
If you’re selling to a business, the invoiced amount gets entered as accounts payable on their end—money coming out of their pocket. For your bookkeeping, it becomes an item in your accounts receivable—money going into your pocket.
Invoices also leave a paper trail. That’s a good thing. In the event you get audited, you’ll need organized, numbered invoices, so you can explain to the IRS where your money came from.
What is an invoice not?
There are a few financial forms that are similar to an invoice, but play different roles. Since they’re often mixed up by entrepreneurs new to invoicing, they’re worth mentioning here.
An invoice is not a purchase order
A purchase order is sent by a customer to a vendor, requesting goods or services. It’s sent before the invoice is ever created. As a vendor, you would receive a purchase order, fulfill the order, and then send an invoice to collect payment.
An invoice is not a bill
A bill is sent to collect immediate payment. For example, when you go to a restaurant, the server doesn’t give you an invoice at the end of your meal—they give you a bill.
An invoice is not a receipt
A receipt is a simple, official acknowledgement that an order has been filled and paid for. If you send your client a receipt, you’ll do so after you’ve already sent an invoice and been paid.
What’s on an invoice?
Every invoice you send needs to include the following.
Your customer needs this so they know how long they have to pay you. Every invoice includes the date it was sent. Depending on the template you use, it may also include a due date for payment.
Names and addresses
That means both your name and address, and the client’s. Even if you’re sending the invoice by email, you should try to include postal addresses. If your client needs to mail you a physical copy of a tax form (Form 1099 MISC, for instance), this will make things easier for them.
All your contact information should be included, in case the customer has a question and isn’t sure how to contact you.
An itemized list of what you’re charging for
Show where the amount due is coming from. Each product you charge for should be entered as a separate line item, with a price and quantity. All of the line items are added up at the bottom and, if necessary, tax is applied. Make sure the “total amount” is nice and clear.
Terms of payment
This is the amount of time a client has to pay you. Typical terms are “Net 30” or “Net 14”—meaning 30 days or 14 days, respectively.
If you offer your clients discounts for early payment, that info will be included here. Noting “2/10 Net 30” means a client has 30 days to pay you, but if they pay within ten days, you’ll give them a 2% discount. Be explicit about any late fees in the case of late payments.
In some cases you may want to use a payment plan where you take partial payments over time. This can help clients who are struggling to make payments.
The shorter the payment terms, the better. Getting paid faster is great for your cash flow.
Further reading: A Quick Guide to Proforma Invoices
Every invoice you send should be clearly marked with a unique number. This number can in fact be a combination of letters and digits. Invoice numbers are important for two reasons.
1. They keep you organized. Invoice numbers can help you keep track of work you’ve done. For instance, let’s say you wash windows for the local YMCA. You invoice format may be “YMCA(number).” When you look back in your records, you’ll know that invoice YMCA001 was the first invoice you sent to the YMCA, and YMCA046 was the 46th.
2. If you get audited, the IRS will look for invoicing inconsistencies as a sign you’ve been misreporting income.
How do I prepare an invoice?
There are three common ways of preparing an invoice.
1. Use a template
With this method, you can use a software template—in Microsoft Word or Excel, for example—each time you send an invoice. These templates are easy to use, but look like professional invoices. You can either attach the invoice to an email, or print it out and send a physical copy. There are plenty of free templates below.
2. Use accounting software
Many types of accounting software let you fill out an invoice template. Some will even let you email the invoice from within the app to streamline the process. This approach only really makes sense if you already use the same software for your regular accounting needs. Otherwise, an invoicing software—such as FreshBooks—may be a better choice.
3. Fill out a paper invoice
Some business owners would like to take computers out of the equation altogether. You can always fill out a physical invoice form. These come in pads, and you can buy them from most large office supply stores. Or you can order some from Amazon.
If you’re a small business, and you don’t send many invoices, you may not be ready for specialized software or a service like FreshBooks. In that case, you can quickly create invoices online using free templates and generators. Here are a few of the simplest and most effective, organized by format.
Microsoft Excel template
You can get a free, basic invoice template in .xlsx format here. Good for Excel 2007 or later.
Microsoft Word template
If you’re not fond of spreadsheets, you can create a .docx file with this free template. It’s good for Word 2007 or later.
Google Doc and Google Sheets templates
There’s a good selection of simple invoice templates for both Google Doc and Google Sheets available from Invoice Simple. You can find the list here. Once you open the invoice you’d like to use, just go to File and select “Make a copy…” to create a copy you can edit.
Online invoice generator
You can create a very simple invoice using Free Invoice Generator. When you use the tool, it automatically saves your info, so you can create invoices more quickly in the future.
We haven’t really talked about the best part of invoicing a client: getting paid. Once your invoice is out the door, you’ve got money coming to you, and it needs to be tracked in your books. You can handle this quickly and efficiently—and get paid sooner, too—once you learn how to set up (and optimize) your accounts receivable process.