What Is an Invoice? Learn about Invoice Functions, Types, and Best Practices

What’s an invoice?

An invoice is a document that records and supports the transaction between two entities. Invoices do much more than that. Generating an invoice starts with the agreement between two parties (business-to-business or business-to-customer) to buy goods or avail services. 

In most instances, invoices are generated for credit or delayed payment transactions, most likely a B2B transaction. The process starts with an interest in the goods or services. There could be a request for a quotation or tendering process. Once the purchaser matches the specifications of the product or service with their requirements, they issue a purchase order.

The purchase order forms the basis for the supplier or seller to prepare the goods or services. The purchase order also specifies the conditions for the purchase, including the terms and conditions for payment. Once the goods or services are ready, an invoice is generated. The invoice moves the transaction from the intent to sell or buy to the next level, which means delivering the goods or services. 

What is the difference between invoices, bills, and receipts?

However, you are likely confused because you have heard the terms invoices, bills, and receipts used interchangeably. It is essential to understand what each means to find the right solution for your e-invoicing and other accounts receivable requirements. 

Invoice: 

In general, an invoice is the record of sale that has all the details of the transaction like the price, the goods or services sold, and the terms of payment like the amount due and the date by which it is due. It also offers details to help you file expenses, calculate taxes, and record the purchase.

Bill:

A bill shares many characteristics of the invoice in terms of the details. In some instances, the terms ‘bill’ and ‘invoice’ are used interchangeably. But if you want to define the difference, it comes down to the context. In most instances, the invoice comes with the implicit understanding of a credit period, after which it has to be used. However, the term bill carries an immediate payment implication. Moreover, an invoice is also a term that suppliers use, and the same document may be termed as a bill from the buyer’s side.

Receipt:

The term receipt can often be mixed with the terms ‘invoice’ and ‘bill,’ but it carries a distinct difference. A receipt acknowledges the payment received once an invoice or bill has been paid. In most instances, using the term receipt interchangeably with the invoice is when claiming business expenses. 

Now that we have clarity on the definitions of bill, receipt, and invoice, let’s dive deeper into the functions of the invoice:

What functions do invoices support?

1. Acknowledgment of the sale along with the details

   The invoice acknowledges the receipt of the purchase order (PO), the details of the order received, the quantity of goods sold, and the seller and purchaser information.

2. Request for payment from customers on time
   The raising of the invoice ensures that the customer is aware of the amount due and the date by which the payment has to be made. With e-invoicing, the invoice often has the payment link embedded in the invoice for ease of payment.
3. Create records for tax and compliance purposes

   The invoice also serves as documentary proof for taxation and compliance purposes. Details like sales tax, other statutory charges, and more can be gleaned from the invoice. The invoice can also contain quality parameters of the product or service to help with statutory requirements.

4. Track current inventory position and records
   Both the seller and buyer can use the invoice to keep track of the inventory levels and make plans for future sales or purchases as required. The invoice helps the finance department forecast the future and arrange funds accordingly.

What are the different types of invoices?

1. To-pay request invoice:
   This is the type of invoice you send to customers to pay the amount after delivering goods or services.
2. Pro-forma invoice: 

   This is an indicative quote or detailed invoice that shows the purchaser what the final invoice will look like and provides the breakdown of the activities and the payments.

3. Interim invoice: 

   An interim invoice is often used when the transaction involves a longer period. The interim invoice keeps the customer updated and places the demand for interim payments as per completion of services or goods partly delivered.

4. Complete and final invoice: 

   The complete and final invoice is not only the payment request but also serves as the report for the completion of delivery of goods or services.

5. Past-due reminder:
   This type of invoice is generated and used when the customer has not paid the dues on time. It is a reminder to pay the amount and could also contain a penalty element.
6. Recurring: 

   When you have a contract for regular delivery of goods or services with a customer, the recurring invoice comes into place. You can set up a schedule that works for both the customer and your organization to have a recurring invoice sent on a particular date. 

7. Credit memo:

   Often, the acknowledgment of the payment received takes on the form of a credit memo denoting that the payment is credited to the customer’s account with you. A credit memo can also be used to call out short payments, if any, or acknowledge over-payment.

What should an invoice look like, and what are the best practices to create the right invoice?

Since we have already read about the functions of invoices and different types, let’s look at the elements that form the best practices for invoice creation.

1. Logo, address, and other contact information

   While it seems obvious, it is critical to capture the details of the seller or the supplier in the invoice. It ensures that the customer can plan the payment, arrange the funds required to pay, and select the right option. These details help the customer keep track of the payments.

2. Number and date of invoice

   Most companies in the enterprise side of the market or the mid-market have more than one purchase process going on with dates that may be spread out over a period of time. It is essential to have the date and number of the invoice explicitly displayed.

3. Name, address, and other customer details

   One of the best practices elements is to address the customer name, address, and other contact details (like the phone number and email address) of the customer’s contact person. This helps the finance department of the buyer’s company direct the invoice to the right person.

4. Purchase order or contract information

   In B2B transactions, there is likely a contract or purchase order tagged to each transaction. One of the best practice elements in an invoice is to mention the purchase order or contract details to ensure that the customer also accounts for the payment.

5. Description of goods and services

   When a B2B transaction takes place, the specification of the goods or services is vital to ensure that payment is made on time. It is best to include the description of the goods or services for complete clarity.

6. Pricing and quantity details

   Due to the sheer volume of transactions in a B2B company, it is essential to explicitly provide details of the quantity sold and delivered along with the pricing to ensure complete transparency.

7. Acknowledgment of receipt of goods or services

   Given the scale of operations and that different teams deal with the delivery acknowledgment and the payment of the goods, it is a good practice to add the acknowledgment details in the invoice itself.

8. Subtotal of the amount due

   The pricing structure of goods and services in the B2B context is often complex and may include storage, transportation, shipping, and other charges. A best practice for invoicing is to ensure that you have the subtotal of the amount due (pricing related to the product or service delivery) displayed.

9. Taxes, rebates, discounts, and deductions, if any

   The pricing of goods and services often includes local taxes, surcharges, and more. It is good to have the details in the invoice as it will help the customer claim rebates or concessions, plan for filing tax returns, and much more.

10. Options and details  for making payments

    The customer not only needs the pricing and the details of the product they have purchased but would also appreciate it if the invoices included easy options to make the payment. For instance, a good practice is your bank account details or embedding a link to enable payment.

11. Other details like comments, notes, and more

    In the B2B world, there are chances that some changes take place even after an order is confirmed. The invoice should contain these comments and notes to ensure that all the parties concerned are updated about the changes.

As we can see from the above section, preparing timely, accurate invoices and having all the details month-on-month is not an easy task. Moreover, the creation and distribution of invoices directly impact collections and, thereby, the cash flow.

If that is the case, then what is the solution? One of the ways to manage invoices well within your accounts receivable (AR)processes is to automate them. End-to-end automation of AR helps streamline the invoicing processes. It ensures that your finance team can focus on more strategic and core activities than mundane manual processes.

This brings us to the question of why automate invoice creation?

1. Quick and accurate Modern invoicing software can consolidate all customer-related data and create invoices quickly and accurately without much manual work. With modern invoicing software, you can add the details of the supplier or seller, and the customer’s data are clear and concise. You will find that using modern invoicing software saves hours of manual effort.
2. Automatic reminders Invoicing on time and reminding customers to pay on the due date is one of the most critical aspects of collections. When you automate the invoicing processes, you ensure that reminders to pay along with invoices are sent on time.
3. Continuity of operations Often, companies face a collections crunch when there is attrition in the invoicing department. However, you can mitigate this issue with invoicing automation. The software would ensure that invoices are generated on time and sent to the right customers.
4. Enabling payment options Another helpful feature of invoice automation is enabling payment links in the invoice itself.  When you enable easy payment options in the invoice, it allows customers to take immediate action.

FAQs about invoices:

Is the invoice a legal document? 

While the invoice is generated based on a legal document—the buyer-seller agreement— it is not considered a standalone legal document. The invoice acts as a reminder or demand for payment.

How long should you give a customer to pay an invoice?

The time you should allow a customer to make payment on an invoice depends on the agreed terms of the purchase contract. Generally, the period can consist of anywhere between 15-60 days.

When to issue an invoice? 

Generally speaking, an invoice is issued once the agreed-upon goods or services have been delivered. However, in some cases, invoices are generated at regular intervals when the order is completed in a phased manner. 

What can you do if a customer refuses to pay an invoice?

When a customer refuses to pay an invoice, you need to do the following:

1. Call the customer and discover what the reason for non-payment is
2. Once the customer clarifies, take the next step accordingly
3. If the customer has the ability to pay but does not want to pay, delve deeper to find the cause for this. In case it is a quality or specification issue, try and resolve it by taking corrective steps
4. If the customer does not have the ability to pay the invoice, it is best to seek legal recourse and try to resolve the issue through the arbitration process
5. Most importantly, tighten the credit onboarding process to minimize such instances in the future