Small business owners are no strangers to doing things outside of their comfort zone. In order to be a successful entrepreneur, you have to be willing to adapt, learn new things, and finally, establish productive systems which contain well thought out processes. You have to be able to do all of those things, in order to provide new value to the market, sell that value and get paid. The last part is being done through a simple, yet elegant process called invoicing.
To those who have not been acquainted with the word, it may seem like a mind-numbingly dull accounting term. And the truth is, it’s definitely not the most exotic part of running a business. But once you understand what it’s all about, and figure out a way to incorporate it into your daily routine, you’ll realize why it’s essential for having a smooth-running organization.
What Is an Invoice?
Invoice is a document which contains essential characteristics of a specific business transaction between two parties – a buyer and a seller. The seller creates the invoice in order to provide the buyer with detailed information about the transaction in question.
To put it in another way, when the seller and the buyer reach a business agreement (i.e. sale), the invoice is written to show the exact terms of the sale. However, an invoice is not a legally binding document, meaning that it’s necessary for both parties to agree on its terms in order for it to become effective.
What Types of Invoices Are There (And Why Is That Important)?
There are many types of invoices, and different invoices correspond to different industries and situations. The most common types of invoices are pro-forma, interim, recurring, final, past due and credit memo.
Pro-forma invoices are preliminary, meaning you send them out prior to delivering a product or providing a service. It gives the buyer a closer estimation of the transaction, and it is generally a result of early-stage negotiations.
If you are involved in a long-term project, an interim invoice is probably the way to go. You can send them out after previously determined periods of time (weekly, monthly,…) and the money you get will allow you to manage production costs. Their main function is to help you better organize the financial side of your business during lengthy and risky projects.
If the agreement with your buyer indicates an ongoing process, you should definitely be using a recurring invoice. They are most suitable for subscription-based or rental industries.
Final invoices should be sent immediately after you have fulfilled your part of the agreement. It implies your demand to be paid, and in case you’ve used interim invoices in the earlier stages, it provides insight into all of the previous transactions as well.
You’ve done your part, but the buyer hasn’t sent you a payment within the agreed time limit? Use a past due invoice. It contains information similar to your final invoice, plus it can include a couple of extra components, like late fees, penalties or interests.
A credit memo is an invoice that informs the buyer you owe him money. It’s primarily used in cases of damaged or returned goods, or if any mistakes were made in the delivery.
It is important to determine which types of invoices will fit your situation best because it will allow you to provide your customer with the most relevant information.
How to Write an Invoice?
Writing an invoice is a pretty worked out process. First and foremost, it’s nice to keep in mind that your invoice should be able to answer some basic questions:
- Who is selling?
- Who is buying?
- What’s being sold?
- Under what circumstances?
- When and how should the payment be made?
And each invoice should consist from a set of key components:
- Seller details
- Buyer details
- Details about the product or service being sold
- Invoice number
- Terms of payment
- Due date
- An appropriate sales tax
Of course, depending on the situation, you can always add specific sections. For example, if you offered the buyer a discount, you should definitely make a notion of it in the document as well.
There is a lot of things you have to keep track of, and designing each and every invoice from scratch can be a hassle. Learn more how to write invoices.
Why Are Invoices Important to Small Business Owners?
Invoices are essential to the accounting aspect of running a small business. Getting paid is a pretty obvious benefit, but there are lots of other advantages of putting in place a well-organized invoicing system:
- It helps you keep track of records and transactions
A well designed and organized record of invoices gives you a clear overview of the way you’re running your business, especially if you’re invoicing online. You can access a specific document at any given time, and review and compare details of different transactions, all within a matter of moments.
- It simplifies the tax filing process
One of the most stressful aspects of running a business is, of course, dealing with taxes. But if you’ve kept track of each transaction through invoicing, there’s no reason for headaches. When it comes to filing taxes, invoices are incredibly useful, because they provide a timeline and give context to other necessary documents.
But even if you have all of your invoices sorted, you still need to approach your taxes very seriously. Here is useful guide where you can learn more about filing taxes for your small business.
- It can help you determine your customer base
The details about your customers in your invoices are a great resource for marketing research. The information you come across in these sections can help you find different patterns, for instance, similarities between clients. If working with a large enough sample, you can determine your market niche, and plan out a specific marketing strategy for the future.
- It can provide you with legal protection
Invoice in itself is not a legally binding document. But a signed invoice is. Always try to get a signature from your clients. This means that even if your client doesn’t want to uphold his end of the deal, you have evidence that the services or goods have been provided to them and that they’ve agreed on the terms stated in the document. It will be the foundation of your case if things eventually get taken to court.
AuthorBio: Mark is a biz-dev hero at Invoicebus – a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.