How Do Invoices Work? A Practical Guide for Merchants
Efficient invoice processing is key to creating a steady flow of income for your business. Invoice processing times usually vary depending on the type of business, its size, and the processing method used.
Consulting firm Basware notes that high-performing accounts payable departments typically take three to four days to process an invoice. In contrast, slower departments take an average of 17 days to complete the invoice cycle.
Shorter invoice processing times indicate that your accounts payable team isn’t spending valuable time on labor-intensive tasks. With a streamlined invoicing process in place, employees can focus on higher-value strategic activities.
In this practical guide, we’ll take a look at how invoices work — their purpose, the most common types of invoices, what to include in them, and how to create them easily.
What is an invoice?
In its simplest form, an invoice (sometimes called a “sales invoice”) records the details of a business transaction. For example, let’s say a vendor provides a small business with office cleaning services.
Each month, the service provider sends the business an invoice that details how much the company owes them for their cleaning services. The invoice also specifies the transaction’s payment terms.
When an accounting firm performs an annual audit for a client, the business will receive an invoice for that service. When an office supplies company delivers a shipment of paper to a printing business, the company will get an invoice for those items.
For accounting purposes, the vendor will record the amount owed as an accounts receivable item. This means that the funds will flow into its business bank account. To the client, that invoice represents an accounts payable item, as the balance is payable from their account.
Keeping detailed invoice records is important, especially for potential IRS audits. Well-organized, numbered invoices will provide a “paper trail” that enables business owners to document their company’s income over a specific period of time.
Invoicing as a tracking tool
A well-prepared invoice performs four important tracking functions. Businesses of all types and sizes should find these tracking tools useful. Invoices:
- Provide a record of the sales transaction
- Show the sale date and amount charged for the item(s)
- Display the total amount the client owes to the vendor
- Act as a cash flow management tool
How invoices differ from bills, receipts, and purchase orders
Several documents describe the transaction in which a seller (or vendor) provides a service to a buyer (or customer). Here’s a brief summary of the differences between each document.
Invoices vs bills
An invoice describes a sales transaction in which the seller charges the buyer for delivered products or services. The seller expects to collect payment for the item(s) later.
However, when a customer receives a bill, they are expected to pay the charges immediately. For example, when a customer dines at a restaurant or has their watch repaired, they are expected to pay the bill right away.
Invoices vs receipts
An invoice describes an already-delivered product or service along with the charge for that item. The vendor expects the customer to pay the invoice quickly.
In contrast, the vendor sends a receipt after they have provided the customer with a product or service. In this case, however, the customer has already paid for the item.
Invoices vs purchase orders
A vendor sends an invoice for a product or service they have already provided to a customer. In turn, the customer sends payment for the item(s) they have received.
However, a purchase order is structured differently. Here, the customer generates a purchase order requesting that the vendor provide specific goods or services. The vendor fulfills the purchase order and subsequently sends an invoice to collect the funds due.
Common types of invoices
Invoices typically vary depending on their purpose. Let’s take a look at some of the most commonly used types of invoices.
1. Pro forma invoice
The customer receives a pro forma invoice prior to their product or service delivery. Vendors issue these invoices to educate customers about the scope and financial commitment for a new project. As the effort progresses, the vendor may adjust the terms due to changes in one or more variables.
2. Interim invoice
A vendor issues an interim invoice when they are completing a large project that entails regular progress payments. When the vendor can collect these scheduled payments, they can more easily cover their project costs and manage their cash flow.
3. Recurring invoice
Vendors issue recurring invoices as an ongoing project proceeds. For example, a bookkeeping business may put its retainer clients on a recurring invoice basis. Each month, a retainer client receives an invoice that covers a predetermined scope of work for a preset fee.
Vendors who invoice clients for the same amount every month should consider automating the invoicing function. This can greatly reduce the hassle of keeping track of due dates and repetitive work.
4. Credit invoice
When a vendor charges a customer in error, the vendor will send a credit invoice to remedy their mistake. The invoice will display a negative number that shows the amount to be refunded to the customer.
5. Debit invoice
A vendor sends a debit invoice when they must increase the client’s amount due for a product or service. For example, the vendor would send a debit invoice if they spent more hours on a project after sending the initial invoice.
6. Past-due invoice
An undesirable past-due invoice means that a specific client has not paid the amount due by the specified due date. This can negatively impact a business’s cash flow, and pursuing these non-payers takes time away from other tasks.
Imposing late fees may get a non-paying client’s attention. Offering multiple payment methods like credit cards, debit cards, and PayPal may encourage clients to resolve their outstanding invoices.
7. Commercial invoice
When a business exports goods to another country, the company must prepare a commercial invoice for customs purposes. The information on such invoices will be used to determine the tariffs on the exported item(s).
A commercial invoice does not have a standard format. However, commercial invoices contain much of the same information as an invoice used in domestic commerce.
The most common invoice components
Invoice formats can vary by industry and vendor. Individual businesses and even freelancers may design their own invoices. That being said, every invoice needs to include five basic components:
- Invoice number (for reference purposes)
- Invoice date (often dictates payment due date)
- Company contact information (for the vendor and client)
- Goods and/or services description (line items, total due, and applicable sales tax)
- Payment terms (including payment date)
Invoice payment terms
Providing easy-to-understand payment details sets the stage for on-time client payments. First, the invoice should specify the invoice amount and payment due date. The vendor should consider providing an early payment date with an associated discount.
It also makes sense to state the consequences of late payments. Finally, including several payment options may increase the chances of timely invoice payments.
How to easily create invoices
Creating an invoice doesn’t need to be complicated — if you have the right tools at your disposal. Here are a few great ways to create invoices easily.
1. Use free invoice templates
Business owners on a budget should consider the free invoice templates provided by accounting software companies. These customizable templates lend themselves to file formats such as Excel or Microsoft Word.
Using powerful invoice software, business owners can create documents that resemble professional invoices. These documents can be sent as email attachments or paper invoices. Either way, business owners can streamline these documents so clients receive a clean-looking product.
2. Use existing accounting software
Businesses that utilize an accounting software program can create an online invoice and accept online payments. Such software automates the entire invoicing process.
When an employee enters a payment, the software generates real-time financial statement updates. For example, the payment entry would reflect changes in the company’s bank account and accounts receivable balances.
3. Leverage SwipeSimple
SwipeSimple offers a range of payment solutions and equipment for small and medium-sized businesses. With the SwipeSimple invoicing solution, merchants can easily customize their invoices with their brand color and logo. They can also send reminder emails from SwipeSimple. All they need is a computer and a web browser.
Invoices are transmitted to the customer via text message or email and include secure payment forms to enable immediate payment. Real-time invoice and payment tracking enable business owners to track their cash flow.
You can create a SwipeSimple invoice in five easy steps. The entire process takes only a few minutes:
- Select the “Invoices” tab on the menu. Choose the “Add New Invoice” button.
- Click on the “Customer Name” field. Choose a name from the existing customer list or add a new customer.
- Enter data into the required and/or optional fields. Confirm that all information is correct.
- Click on the “Send Invoice” button. Add the customer’s phone number and/or email address.
- Send the customer invoice.
The Payment Depot + SwipeSimple advantage
The Payment Depot + SwipeSimple solution presents merchants with several advantages. Payment Depot is a highly rated merchant account provider with a membership structure and month-to-month merchant agreements. Payment Depot offers competitive wholesale pricing, superb customer support, and a reputation for transparency.
SwipeSimple adds several benefits of its own. Besides its invoicing features, users will receive a free chip card reader. SwipeSimple offers competitive rates and doesn’t subject merchants to expensive cancellation fees. Finally, good customer support enhances merchants’ user experiences.
To learn how Payment Depot and SwipeSimple can provide powerful invoicing and merchant account solutions at an excellent value, contact us today.