For business owners, sometimes the hardest job can be getting paid by clients and chasing them up. If you’re new to invoicing, then you may not realise there is a lot more to them than meets the eye. This guide will cover all you need to know about invoicing.
What Is An Invoice?
Invoices are payment demands. Once a sale has been made, an invoice will be created by the seller and sent to the buyer of services or goods. An invoice will contain the details of what goods or services were provided, along with the value to be paid to the seller.
What Is An Invoice Used For?
Invoices are mainly used for recording sales that are made with clients which can then be used for accounting purposes. Some other uses for invoices include:
- Keeping track of sales made.
- Used to request payment from clients.
- Predict future sales by using previous sales data.
- Monitor inventory levels when selling products.
- Record revenue for tax reasons.
- Ensure customers make payments on time.
How Do Invoices Work?
Invoices work in a few stages. Here is a small breakdown of a standard invoice:
- A customer purchases goods or services from a business.
- All details from the sale, such as the value of the transaction, the name of the business and the buyer. This document is used as an official request for payment from the buyer.
- An invoice is created, then sent to the buyer. This can be sent via paper, electronically or other methods.
- Once the customer receives the invoice, they must pay the amount requested within a certain amount of time. This varies with different factors.
- The buyer sends the requested amount to the business and the transaction is completed.
Why Are Invoices Important?
Invoices are important for businesses for many reasons. If invoices aren’t correct, customers may pay the wrong amount or even refuse to pay. You could lose a lot of money by making a mistake on an invoice. Also, as invoices are used for tax documents, you may get into trouble with HMRC if there are errors made.
What Do I Include On An Invoice?
Here are a few tips we’ve listed to help you on the way to creating an invoice:
1. Create a header using your company branding.
There are plenty of online templates for you to use, or you can start from scratch. At the top of your invoice should be your specific branding, such as the logo and company name. This helps to make your invoice look professional, but also the customer will straight away recognise where the invoice is from, hopefully getting you paid a little faster. It should be clear as easy to read, but use your company colour scheme and font.
2. Make the word ‘INVOICE’ clear and visible.
Every invoice should have the word ‘INVOICE’ written in capital letters at the top. Having a clear intention of what the document is, makes sure the right person receives the invoice and the intention is clear.
3. Provide your business details.
Invoices should list your business details, such as:
- The owner’s name and/or company trading name.
- The correct registered business address.
- Business contact details, including email and phone number.
4. Include customer’s details.
When writing out an invoice, under ‘Bill to’ it should include:
- Customer or client’s name. Also include contact name and address for businesses.
- Customer’s billing address.
- Reference number, such as order number.
5. Provide a unique identification number.
A unique identification number is issued to customers to avoid invoice duplications. The identification number should increase with each invoice made and it is advised to include the date that the invoice was created and sent.
6. Show the sale details.
In the invoice, there should be a table that describes everything about the sale of the goods or service. In this table, you should include:
- A description of the goods or services that were provided, along with the date of the delivery.
- The amount of the product that was provided, or the number of hours for service.
- Add the unit price, this is the price per item or service.
- Then a total, adding up the combined amount of quantity multiplied by the unit price.
Along with the table, you should include additional information regarding the sale. The following should be added:
- The subtotal – Combined totals for each row in your table.
- Any discounts – Typically a percentage, added if discounts have been applied.
- Cost of shipping and handling – Adding postage costs.
- The tax rate – An example could be VAT, written as a percentage.
- The total tax – Tax written as an amount.
- The total balance – The total amount due after tax and discounts have been applied.
7. Finally, payment terms
Located at the bottom of the invoice should be the payment terms, along with space for additional notes. If there was an agreement made with the customer for payment times, this should be included. Add in the bank details for the account you’d like to be paid into.
What Is Included In An Invoice?
On an invoice, you’ll usually see the following included:
- It will be clearly stated as an invoice, with the word visible towards the top of the document.
- You will see the name of the company and customer, along with their address and contact details.
- Labelled description of the goods or service provided.
- Dates of supply for the goods or service.
- There will be a unique reference number.
- The amount owed, including the VAT sum, along with any discounts and the overall total amount owed.
- Invoice issue date.
- Invoice due date.
What Are The Advantages And Disadvantages Of Invoices?
|Remind clients of the work completed and for payment.||Any mistakes could result in underpayment, delay of payment, or make your company look unprofessional.|
|Can be used for record keeping, ideal for tax records.||Invoices that are sent late may result in customers take their time with payments.|
|Professional invoices make your company look more established.||If service records aren’t kept, invoices can be challenged.|
|Easy to make with lots of templates available online.||Have to be award of fraud and scams.|
Invoice Times For UK And Overseas
In the UK, rules state that payments must be made within 30 days of receiving an invoice unless both the seller and buyer have agreed to an alternative.
Various businesses operate slightly differently, with some larger companies using the timescale of 90-120 days for smaller companies to accept the terms of payment. Other companies may offer a discount if there is an early payment settlement or if there has been a payment made in advance.
With times being uncertain at the moment and many businesses trying to survive, many SMEs are protecting themselves by asking for invoice payments to be made within 7 days.
In Europe, the picture is similar in most countries, however, some do work slightly differently, such as:
- In Scandinavia, invoice payment deadlines are usually 14 days.
- For businesses in both Greece and Italy, invoice payment deadlines are typically within 50 days or more.
- Across Spain, invoice payment deadlines are on average 45 days.
How Do I Pay Invoices Overseas?
There are numerous ways you can pay invoices overseas, such as via your local bank, through a banking app or at your local post office. Just ensure you pay the invoice in the format you and the seller agreed upon.
When Will I Be Paid From An Invoice?
With invoices, there are lots of different terms that will determine how long it will take to be paid. Below is a table showing some of these terms and how long you will usually wait to receive funds:
|Net monthly amount||Payment will be received on the final day of the month.|
|PIA||Payment in advance.|
|Net 7||Payment will be received seven days after invoice date.|
|Net 10||Payment will be received 10 days after invoice date.|
|Net 30||Payment will be received 30 days after invoice date.|
|Net 60||Payment will be received 60 days after invoice date.|
|Net 90||Payment will be received 90 days after invoice date.|
|EOM||Payment will be received at the end of the month.|
|21 MFI||Payment will be received on the 21st of the month.|
|1% 10 Net 30||If a payment is made within 10 days, the customer receives a 1% discount. If not, payment is due 30 days after invoice date.|
|COD||Cash payment received on delivery.|
|Cash account||The account is conducted on a cash basis. This is not credit.|
|Letter of credit||Receive a documentary credit confirmed by a bank.|
|Bill of exchange||Often supported by a bank, receive a promise to pay on a later date.|
|CND||Receive cash on the next delivery.|
|CBS||Receive cash before the shipment.|
|CIA||Receive cash in advance.|
|CWO||Receive cash with the order.|
|1MD||Monthly credit payment of a full month’s supply. Allowing 30 days from the date of invoice.|
|2MD||Monthly credit payment of a full month’s supply with an extra calendar month|
|Contra||Payment is offset against the value of supplies; this happens when a customer is also a supplier.|
|Stage payment||Payment is agreed in stages or milestones.|
VAT Invoicing With Brexit
With the UK not being a part of the EU after Brexit, the government created a new initiative called ‘postponed accounting’ for VAT. Postponed accounting applies to any goods that are imported into the UK from both non-EU and EU nations.
But what does this mean for UK businesses that are VAT registered? Well, on their VAT return, they can account for import VAT, rather than paying import VAT immediately after good arrive onto UK soil. It is worth noting that customs duties will need to be paid still.