Introduction to Invoicing

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What is invoicing?

Growing up, did you ever buy your sibling an item and make them promise to pay you back? Maybe you made them sign a gum wrapper in blood to make sure you received your money in a timely fashion! If so, then you, my friend, are already familiar with the concept of invoicing!

In the simplest of terms, an invoice is a bill sent from the seller to the buyer, documenting what was purchased and what payment is owed. Also known as a bill or contract of sale, an invoice allows you, the business owner or freelancer, to keep track of business transactions and make sure that you get paid!

When you are just starting out, the concept of invoicing can seem a bit overwhelming. This article will aim to break down some of the basics for you and help you get a good idea of where to begin!

When do I need an invoice?

If you are a business owner or freelancer, then at some point in time, you will need to know what an invoice is and probably even how to prepare one. Though invoices are not necessarily required in all business transactions, they are generally expected in the business world. Value invoices like you would any important business tool; they may come in many different forms, but when used correctly, they can help you get the money you are owed. Any time you’re billing a customer for the sale of an item or for a service that you have provided, an invoice should be sent. In situations when full payment has already been made, it is a good idea to send out a receipt instead. Keeping invoices also ensures that in the event of a dispute, both you and your customer have copies of the transactions that occurred and the amounts owed. This can help protect you in the event that you need to produce evidence of a transaction when pursuing legal methods to obtain money owed to you.

Are there different types of invoices?

In its most general sense, an invoice is defined as a commercial document that lists two main types of transactions: the sale of goods and the sale of services provided, as well as the amount due for these. Just to clarify,

  • Invoices for services – If you are a consultant, a designer, or a repair person (just to name a few), then you are providing your clients a service. There are two main ways to charge clients for services provided. You can charge an hourly rate, or you can charge a fixed sum. One method is not necessarily better than the other, and in many cases it depends on your personal preference and that of your client. When charging hourly, your invoice should include services rendered, your hourly rate, number of hours worked, and total cost incurred. For a flat-rate invoice, you’ll simply include the services rendered and the cost. In most US states, services aren’t subject to sales tax–but check your local regulations to be sure.
  • Invoices for goods – If you own a business that sells goods, whether that be ping pong ball necklaces made in your grandma’s basement or artwork made from grass clippings, then you will likely charge per item. Your invoice will include information like the quantity of products purchased as well as the individual price of each item and the total amount due. Most likely, you will need to collect sales tax.
  • Invoices for both – Sometimes there are instances where both services and goods have been provided to a customer. For example, a plumber might charge you an hourly rate to fix a broken pipe, and will also charge you additionally for the new pipe. Same with a mechanic; they will charge hourly for their labor, as well as for any new car parts required. In cases like these, both the hourly rate as well as the charge for goods will be listed on the invoice.

Is an invoice the same as…?

  • A receipt – So, is an invoice just a fancy word for a receipt? No, a receipt tells you when you were paid in full and an invoice is a bill stating you still need to be paid.
  • A cash memo – No, a cash memo is given to a buyer when they have paid for an item in cash. This works as a proof of payment. A cash memo is received when the payment is complete, whereas an invoice is sent prior to the payment.
  • A purchase order – No, a purchase order is used to order goods from a supplier and, upon acceptance, creates a contract between the buyer and supplier.
  • A sales order – No, a Sales Order confirms the sale between the buyer and seller. It is the document sent to a buyer detailing the items being sold or services to be completed before the actual delivery date.
  • A delivery note or packing slip – No, a packing slip is an itemized list of the contents of your package that doesn’t include prices. It will usually include a quantity, description, and weight of the package contents.
  • A tax invoice – No. A tax invoice is used by a seller or registered dealer for items being sold to another seller. These are used for items that are sold with the intention of being resold. At the end of the financial year, these invoices are turned in to the proper tax authorities. In many countries, governments use them to deter tax evaders.
  • A proposal or bid – No. An invoice is a request for payment; a bid is an estimate of costs and can be accepted or declined by the client.

Other Types of Invoices:

There are several different types of invoices:

  • Commercial invoice – Also known as retail or sales invoices. This document indicates items bought and sold and contains pertinent information to the business transaction.
  • Interim invoice – When working on a long project, interim invoices are sent out at regular intervals (maybe weekly, monthly or even at the quarter, half, and three-quarter mark of a project). Interim invoices are followed by a final invoice which should include the full payment amount and a record of all previous transactions.
  • Retainer invoice – When working with a client on a long-term basis, some professionals use a retainer agreement. This means that the client pays a set retainer fee, usually on a monthly basis, to retain the professional’s services. The professional then performs work as needed throughout the month, paying themselves with this retainer fee. If you use this kind of arrangement, you’ll need to send out an initial bill for the amount of the retainer – but you won’t record this as income (instead, it becomes a liability – money you have to pay back to the client if you don’t perform the work agreed upon). Then, as you perform the work, you’ll send out invoices which apply the retainer amount to the payment due until the retainer is exhausted.
  • Pro forma invoice – Pro Forma is a Latin phrase meaning “for the sake of form.” It is an invoice that is sent out before any goods or materials actually ship. It is often used in relation to customs when importing goods.
  • Recurring invoices – These invoices are handy when you have a customer who you work with on a continuing basis. Automating these invoices can be a great time saver for you as a business owner as well.
  • Past due invoices – If you have a client who has not paid their bill, then you might send a past due invoice. They are also called overdue account notices or interest invoices. They will usually include the total amount due, including any late fees and interest that may have accrued.
  • A final invoice – If you used interim invoices, a final invoice might include records of all of these transactions. It would be issued at the end of a project and include the final amount owed.

What does my invoice need to include?

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It is important that your invoice is prompt and clearly written. Invoices typically include the following information:

  • A description and quantity of the merchandise being sold (or of the services you have provided)
  • Itemized and total cost of the merchandise or services
  • Customer information (Such as the customer’s name, address, contact information, etc.)
  • Seller information (This would be your company name, contact information, logo etc.)
  • The date of issue
  • An invoice number
  • Any discounts
  • Payment terms and due date
  • Any late fees that may be applied
  • Tax information in some cases (But we will get to that a little later.)

Depending on where you are located there may be different requirements for what needs to be included on an invoice, so you should check the laws that apply to your corner of the world. There are also other laws that be relevant when items are being bought and sold internationally. Knowing all of the requirements for each country can be a challenge, but (here) is a link to some more information.

How should you prepare an invoice?

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As was previously mentioned, invoices come in many different forms and in varying degrees of professionalism. From scraps of paper to Microsoft Word documents, from Excel spreadsheets to cloud based software, there are myriad ways you can create an invoice and a variety of looks you can achieve. While you want an invoice that looks professional, don’t be afraid to add some of your own style to it.

When you are just starting out, invoicing can be time consuming, especially if typing them from scratch in, say, a Word document. In addition, time spent writing invoices is also not necessarily time you are getting paid for, especially if you are a freelancer. Luckily, while there is no required way of writing an invoice, some options may prove to be easier and more manageable than others.

Making your own – Invoices can be created in Microsoft Word or Excel. There are a number of pre-made templates out there to choose from, and many of them are free. If you want a good idea of what an invoice template looks like, try doing an image search for “invoice template.” If you see one you like, look and see if it is available for downloading.

Invoicing programs – Invoicing programs typically have features such as invoicing templates and record storage. When using internet or cloud based software (or e-invoicing), there are other perks such as access to customer service assistance and the ability to work on your invoices from any internet connected device. Many programs even allow customers to pay online. There are many invoicing programs available. If you’re interested in switching from Word Documents, Excel sheets, or even email created invoices, there are quite a few free or inexpensive options out there. Many companies offer different options for different prices and a lot of them have a free option. Once you’ve done a little research, the program that works best for you and your company should become clear.

Accounting programs – Any accounting program worth its stuff will include basic invoicing tools.

Just remember, you want to develop an invoicing system that is organized, efficient, and works for you, because the quicker you send out the bill, the quicker you get paid!

Payment terms:

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Payment can be requested in several different ways. It is really up to you as the business owner to decide what works best for your situation. Here are some of the top industry standards:

  • Net 15 – Payment is due 15 days after the date of the invoice.
  • Net 30 – Payment is due 30 days after the date of the invoice.
  • Net 60 – Payment is due 60 days after the date of the invoice.
  • 2/10 Net 30 – Payment is due 30 days after the date of the invoice. If paid within 10 days, the buyer will receive a 2% discount.
  • Immediate payment/due upon receipt – As soon as your client receives this invoice, the payment is due. If your client fails to pay this immediately then you can legally repossess your goods.
  • Advance payments – These occur when a payment is made before a service or good has been provided. Many times they are used by sellers to protect against people not paying their bill.

While it’s good to know what these terms mean, it can be more helpful to your customers to see terminology they understand. According to FreshBooks’s blog, in 2010, invoices sent through the program were paid faster on average if they used printed terms like “Please pay within 21 days” as opposed to “net 30.” Printing an actual due date on the invoice is a great way to make sure there are no misunderstandings.

What about including taxes?

There are five states in the United States that do not have statewide sales tax: Delaware, Montana, Oregon, New Hampshire, and Alaska (which has no state-level tax but does allow municipalities to implement retail-level tax). If you do not live in one of these states, you may be aware of sales tax from the perspective of the buyer, but what about from the perspective of the seller/small business owner? Learning how to include sales taxes in your invoices and learning what products need to be taxed and which do not can be a daunting task, but it is very important that you learn this information so that you don’t unwillingly commit tax fraud; no one wants to be audited, either. Generally, you are going to want to look into the sales tax laws in your area so that you can figure out what may apply to you and your business. For instance, in many cases, sales tax is required with the sale of goods but not with services. Again, check the sales tax laws that apply to your area of the world to make sure!

If you need to collect sales tax, this should have its own line on the invoice, after the subtotal, but before the total.

How do you handle a customer who doesn’t pay?

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So, you’ve sold your product, you’ve completed work for a client, and sent them the bill. The due date has come and gone without payment. What do you do now? Especially if you are a small business owner or a freelancer, not getting paid can really be a problem. Here are several steps that you can take to try and get a stubborn customer to remit payment:

  • Reminder – While not receiving what’s due to you can be extremely frustrating, your first course of action should never be taking your client to court or calling them with threats. Sometimes it is simply a case of forgetfulness. Try sending a polite but firm reminder.
  • Resend the invoice – This takes care of clients who may have “lost” the invoice.
  • Cut them off – If these steps don’t work, stop providing services or repossess goods. If you stop paying your phone bill you don’t expect to keep using your phone do you? The same logic applies here. If you are not being paid, do not continue to work for free.
  • Be persistent – You don’t have to be angry when repeatedly requesting payment, just don’t stop asking for the money owed to you. If your emails go unanswered, try calling the customer every day until they pay. This is not a step you should jump to the day after a first payment is missed. You don’t want to annoy your client and make an enemy right off the bat.
  • Get a third party involved – It might be in your best interest, depending on the amount in question, to hire an attorney or a collection agency to help you receive what’s owed to you.
  • Court – If all else fails you can try to resolve your issues in a small claims court. Before doing this, make sure that you look into how much this might cost and if it is even worth the hassle or financial risk.

How to Ensure Getting Paid:

Here are some preventative measure you can take to try and make sure you receive payment in the future:

  • Research – Especially if you are a freelancer, it might not be a bad idea to do a little bit of research on your potential client. Do they have bad reviews? A history of not paying? If so, it might be a good idea to just pass on working for them.
  • Discuss payment terms first – Make sure that you and your buyer/client are on the same page. Go over your fees and explain your payment terms and the expectations associated with them.
  • Contracts – Especially if you are a freelancer, drawing up a contract is strongly suggested. This will not only lend your freelance business an air of professionalism, but will also protect against legal problems down the road. Unless you have experience in this area, you should not be writing your own contracts. If you can, consult with a lawyer to make sure that the contract is enforceable and provides what you need. There are also a couple legal services websites you can use to download a basic freelance contract for some types of businesses; this is a step above writing your own, but not as good as hiring a lawyer. (See this Consumer Reports article for more details.)
  • Late fees – Charging interest on late payments provides a sense of urgency that will help ensure clients do not make paying you a low priority. Make sure you are clear on your original invoice and any follow up communications; spell out exactly what your late fees are and when they will apply. For example you might charge a 1.5% interest fee every month on late payments.
  • Give incentives – Give your client a positive incentive to pay you early. For instance, you might offer a 1 or 2 percent discount if they pay you back within a specific “early” time frame. This is also a good thing to discuss with your client upfront; transparent communication will not only help you to get paid, it can also increase customer loyalty.
  • Payment/partial payment in advance – Especially when working you are on a lengthy project or have not built a relationship with a client yet, it is a good idea to consider asking for part of your payment in advance.
  • Be prompt – Make sure you send an invoice as soon as you complete your job. This is very important.
  • Be proactive – Sara Horowitz wrote the book on getting paid as a freelancer (no really, it’s called The Freelancer’s Bible). She is also the founder of the Freelancers Union. Horowitz suggests that you send invoices “in triplicate.” Send one by email and one by snail mail, and then call letting your client know that the invoice was sent. “If this is what you do on round one, let them imagine what round two and three will be like.”
  • Be polite – An article in the Freshbooks blog indicates that adding a please or a thank you to your invoice can increase your likelihood of being paid by more than five percent!

Still feeling overwhelmed? Don’t worry, professional invoicing is a tricky process and takes time to master. There are a few important steps to remember. Make sure to include all information pertinent to the transaction on your invoice, understand which payment terms you are going to use, and look into any sales taxes that may apply. Finally, consider the practicality of an invoicing software program and make sure that you are taking preemptive measures to ensure you get paid in a timely fashion. Keep at it, don’t give up, and pretty soon you will be an invoicing professional!

Elizabeth Cranston

Elizabeth Cranston

Writer and Reviewer of Point of Sale Software at Merchant Maverick
Elizabeth Cranston is a writer and native Oregonian who lives in the beautiful Pacific Northwest. She enjoys researching and getting to the bottom of questions relating to the Point of Sale industry.When not writing about and researching Point of Sale software, she can usually be found overindulging in Dutch Bro's coffee, making others laugh, or listening to music.
Elizabeth Cranston
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    Online Invoice Application

    It’s very useful article, we are impressed about that. And Thanks for sharing this post to all, What you mentioned in the article that was an excellent one. This site very helpful to all


      I always recommend seeking assistance if you are having a problem figuring out your invoicing system. Or if just parts are overwhelming and you have a lot of invoices, there are outside companies that can help with all of your invoice printing. Great information, thanks for sharing!

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