An invoice is an essential part of running a business, both for ensuring proper record keeping and for securing legal protection, but what is an invoice exactly?
In the world of business, it’s important to pay attention to your invoice process, it’s a crucial cog in the financial management process, and without one, you’re left open to a loss in profits and exposed to potential legal scrutiny.
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What is an invoice?
In short, an invoice is a formal request for payment of a business’ services/products. A business will send a formalised document to their client, breaking down the items or services that have been agreed to.
It is a legal record of sale and proof that a business has fulfilled its end of the deal. It also helps the client understand exactly what they have paid for and how their bill has been accumulated.
An invoice is part of the project management process; it protects all parties involved in a transaction and ensures proper awareness of the specific details. Businesses will use their records of invoices to manage resources and calculate profits.
What is an invoice used for?
An invoice serves several purposes for a business and its clients. They are legally binding documents, meaning that they can be used to enforce payment and brought in as legal evidence.
An invoice serves several purposes; not only do they serve to keep the client well informed and provide a legally binding document of the services/product rendered, but it also assists in bookkeeping, filing expenses and operational management.
The invoice provides a record of the sale and ensures that all parties are aware of the details of the transaction. They are used to reduce payment disputes and inform the client of any outstanding balances or upcoming payment dates.
In the event of a dispute, an invoice will be an important piece of evidence both within the legal courts and in the court of public opinion for reputation management. If a business can prove they have upheld its end of the deal, then it will help maintain its public relations image.
When is an invoice given?
In standard practice, invoices are usually generated towards the end of project completion. They summarise the services rendered and are a formalised request for payment. It’s proof that the business has delivered its products/services to the client and is now finishing up the project cycle.
What is required on an invoice?
An invoice is a legally binding document, so it requires specific information in order to meet the legal requirements. Depending on the size and scale of your business, you might require different information for the invoice specifications.
What does an invoice for a small business need?
If you are a small business or freelancer based in the U.K. and earning less than £85,000 per year, then you won’t need to register for VAT, unless you request to do so before meeting the threshold. This means you do not need to apply VAT pricing to your invoice documents, but you will need the following information:
- Your full name
- Your business name and business address
- Clients name
- Clients business name and business address
- Unique invoice number
- Issue date of the invoice
- An itemised list of products/goods provided
- Date the services/products were delivered
- The itemised cost of each item
- Total bill amount and expected patent date
No matter the size or profitability of your business, an invoice still provides legal protection and is a crucial cog in the wheels of business management.
What does an invoice for a large business need?
If your business turns over £85,00 annually, then you will need to ensure that you contact HMRC and become VAT registered. This also requires you to charge VAT on your business transactions, so you will need to list this on a VAT invoice.
You will need all of the information that a small business needs to include on their invoices, as well as some additional details including.
- Your business’ VRN – VAT registration number, provided by HMRC.
- An itemised list of the products/services provided, excluding VAT.
- The VAT rate charged to each product/service.
- Subtotal of the final amount excluding VAT
- The total amount of VAT to be paid.
Creating an invoice requires lots of important information that needs to be correct in order to protect your business from future disputes and ensure the proper payment of the services rendered.
Free templates for creating an invoice
There are some really great invoice templates available for free online. Simply download the template and insert the relevant information. They will make your business management a lot easier and more manageable.
Check out these free invoice template websites that do much more than just giving you a basic invoice template:
Invoice Simple provides clean and neat invoice templates that are free to download on most printable formats. They include space for essential information and automatically calculate the subtotal and grand total amounts.
This platform also has specific invoice templates for different industries that may require space for more specific information, i.e.) photography, construction, etc. They also have templates available in Spanish, German, Italian and French.
Square Invoices in another free invoice template provider that allows you to download invoice templates quickly. You can also add your own brand logo to the heading and choose a custom colour to personalise the invoice.
The great thing about this platform is that it also generates a shareable link to send your invoice to clients through email or text. Allowing them to quickly pay online with Google Pay, Apple Pay or their card.
Invoice Home provides over 100 different invoice templates for you to choose from. They are free to download or print and come in a range of different formats. Choose between a basic version, or view the advanced options for more transaction details.
You can also add your brand logo to this invoice software and download it in a range of languages including, English, Spanish, French, German, Italian and Portuguese.
How to download an invoice template
You should ensure that you are downloading your invoice template with the correct software system that you use, e.g.) Excel, Word, Google Docs, and Google Sheets. Once you have input the relevant data, simply save it as a PDF file.
This saves the document like an image, so when you send it to your client, it will load correctly on their screen, regardless of whether they use Google doc software or Word processing software.
What happens if an invoice is not paid?
If a client does not pay an invoice, you can take steps to secure payment. Start with a friendly reminder via an email or letter, ensuring all forms of contact are in writing, leaving behind a paper trail.
If you can make contact with the client, try to arrange a payment plan without involving legal action, as this will only accrue charges to both parties. If you cannot make contact with the client, then (if applicable) suspend any services that you are still supplying to them.
If you are still unsuccessful in making contact with the client via your own attempts, you are entitled to take legal action. The first course of action is to send a statutory payment demand, where the client has 21 days to make the payment.
You should always seek legal advice before committing to a legal course of action, ensuring that you are making the best decision for your business.
What is the standard late fee on an invoice?
If a client has failed to keep up with their invoice payments, you are entitled to charge a late fee. For small businesses, this usually ranges from 1-1.5%. You should highlight this clause in your initial invoice details, as it usually incentivises clients to pay on time. A late-fee charge is usually applicable after 1-month of missed payments.
What is an invoice – FAQ
If you’re new to business management or just want to brush up on your invoice knowledge, check out our responses to the frequently asked questions about invoices below.
What is an invoice number?
Each invoice that you create will have its own unique invoice number. This allows a business to track the payment from the client until the balance is paid in full. An invoice number will also be used for documenting incomes and tax purposes.
Is an invoice the same as a purchase order?
A purchase order is not the same as an invoice. A purchase order is usually generated before the project cycle has begun. It defines the expectations of what the business is going to deliver to the client, and it sets out the parameters for future payment schedules.
What is a PO number on an invoice?
A PO number stands for Purchase Order number. It is a unique number that is given to an order as soon as the services/goods are requested. This allows the seller to track the transaction throughout the project’s whole journey, ensuring proper order management.
What is FOB on an invoice?
A FOB stands for “free on board” – it’s a term used to specify when the property becomes the responsibility of the buyer and no longer the responsibility of the seller. A FOB is usually found on invoices that require shipping goods, and it helps determine ownership in the event of order disputes.
What is an itemised invoice?
An itemised invoice is a detailed description of the services accrued for payment. This may include hidden charges that clients may not initially be aware of, such as:
- Labour costs
- Travel costs
- Cost of materials
- Editing time
It’s a clear description of why you have charged the client that specific amount. Highlighting the services they received and the time and effort that went into completing the project cycle. An itemized invoice is a great option for industries that require a lot of work behind the scenes, e.g.) video production, construction, landscaping, etc.
What is an outstanding invoice
An outstanding invoice is an invoice that has yet to be paid for by the client. A business will send a client an open invoice if they still need to make a payment or make contact to manage their payment schedule.
What is an open invoice?
An open invoice is the same as an outstanding invoice; it’s an unpaid balance for the services rendered. However, some businesses may delay payment due to financial cycles. An invoice can be used to allow for some flexibility with payment, as you still have proof of purchase.
What is the difference between an online invoice and a receipt?
An invoice is a request for payment from a business to a client for any services rendered. A receipt is a document that states the balance has been paid in full or a partial payment has been made.
Both are important pieces of documentation in the transaction process. Together, they can be used to track the payments journey, identify late payments or double-check in instances where there may have been an overpayment.
What is an invoice on PayPal?
Businesses that use PayPal to complete transactions from business to client will also have access to Paypal invoices. This allows business to customise their templates, add their own logos to request payment from a client. PayPal invoicing ensures all of the necessary information is collected and provides a digital record of transactions.
Now you know the answer to what is an invoice – so go make one
Now you know what an invoice is and why your business needs them, you can create one for managing your financial operations. Not only is it a legal requirement, but it will also help make your business operations run a lot smoother, especially in the event of a payment dispute or if you need to track down an order.
Check out the free invoice templates and customise your own to suit your business’ brand.