An invoice is one of the most basic business documents. However, you may have questions if you’re new to running a business. You may also have questions about its details. Or, wondering if there’s anything to do with them besides filing them away and later forgotten.
What is an invoice? What’s it used for? How are they made? These questions, and more, get answered in this article — so keep reading!
What Is an Invoice?
An invoice is a document detailing one of two things:
- A sold product
- A rendered service
An invoice transfers from the provider to the purchaser of the item or service. This document is a semi-binding agreement for payments. The purchaser pays the amount owed by the stated date (and complies with any other terms).
Note: “Semi-binding” with the understanding the purchaser doesn’t ghost the provider.
In a way, an invoice is interchangeable with “bill” and “purchase order”. Their intent is to get the provider paid and offer a paper trail for the transaction.
Types of Invoices
A business may get or send out a dozen+ types of invoices. The type is pretty explanatory since they’re usually named after its intent.
Here are a few types of invoices you may run into when running a business:
If people say they’ve sent an invoice, then it’s usually a ‘standard invoice’. Though, keep an eye out since it’s good to familiarize yourself with the different types.
Invoice vs Receipt
Let’s take a moment to clear any confusion about invoicing and receipts.
- Invoice — Created before the payment
- Receipt — Created after the payment
The confusion likely stems from people filing invoices with their receipts. You could print and note the invoice as ‘Paid in Full’. This could work as a receipt if you’re loose with record-keeping. But, it’s better to get a receipt when the transaction completes (for safekeeping).
What Is an Invoice Used For?
Now let’s go a little deeper into invoicing. Particularly: Its use. You can do a lot with an invoice when running a business.
Below, we’ve got three of the most common uses of an invoice.
Most businesses have payroll services for handling all things employees. Some businesses (perhaps yours) may not need something as complex.
A freelance business, for example, is a prime candidate for standard invoicing. Another would be if you bring on a lot of contractors or 1099-type employees.
The invoice becomes a bit of everything payroll:
Send it off, get paid, and file it. There you have a simplified payroll system.
There are a lot of great ways you can use invoicing as a means to fund your business.
These include options like:
- Invoice factoring — Selling unpaid invoices to a 3rd party
- Invoice financing — Borrowing against the unpaid invoices
Both options are a form of short-term business funding.
Invoice financing and factoring are great when you’re in a cash flow shortage and/or expanding via growth. Or, if you have an incredible opportunity but need to act fast. These options let you get the capital needed to keep going full-speed!
At one point we mentioned the invoice as “semi-binding”. There’s nothing stopping someone to bail paying it after receiving one. In some situations, there’s nothing a provider can do about this.
It’s unfortunate and sometimes unavoidable. An invoice does offer a proper form of accountability. It is a great piece of evidence if one needs to escalate payments through legal means.
How to Make an Invoice
Do you need to make an invoice for a delivered product or service? Need to wrap your head around the concept as someone who received one? Let’s go ahead and use this section to make one so it answers both questions.
Making an invoice from scratch is a little involved but they’re actually simple. It’s not like you’re writing a resume — you only need the essentials. Dress it up with graphics if you want. Sometimes simple invoices are best to get your point across.
The main components and invoice details will be…
- Invoice ID/# — States the invoice’s number or ID for easier tracking
- Contacts — Business and client contact information
- Services/Items — An itemized breakdown of products or services
- Terms — Extra terms someone is expected to comply with
- Due — The amount due
Dig out some invoices from your files if you need a visual. Or, hop on over to Google where you’ll find a ton of examples. You can see that they’re pretty basic which means making them is pretty simple.
Try this with a word document:
- Open a new document
- Place your contact details in the header
- Use column #1 to list products or services
- Use column #2 to list the amount due and client contact info
- List notes and terms around or in the footer
Try touching up the headings with different formatting if you want. Otherwise, that’s about it for its design. It’s simple but effective at conveying its message.
By far the easiest way to put together an invoice is with a template.
- Downloadable templates
- Generators and builders
- Cloud-based worksheets
Most accounts receivable and accounting software include them. Some payment processing platforms offer templates, too. There’s no reason to pay for a template given the number of free resources out there to make them.
Building a Better Business Starts Here
You’ve made it to the end! You got the answer, and more, to your “what is an invoice?” question. But you probably have other questions about building a successful business, right? We got you covered no matter what else you need for running your business!
Explore the many, great business resources we’ve created. And, use our website to find and connect with the best business service and business funding providers.