What is an invoice and how does it work for small businesses?
Invoices help business owners manage client relationships, organize their finances and improve cash flow. Presented by Chase Payment Solutions®
Key takeaways
- Invoices are formal documents issued by sellers that itemize goods or services delivered and request payment from buyers.
- Efficient invoicing can help small businesses monitor payments, handle cash flow and organize financial records.
- Distinguishing between billing and invoicing may help prevent confusion when conducting business.
For many small business owners, invoicing may feel like a tedious administrative chore. However, whether you are trying to eliminate cash flow gaps, reduce transaction fees or simply ensure you get paid promptly, understanding how invoicing works can be helpful.
Keep reading to learn more about invoices, including how to create them, ways they are beneficial and invoicing best practices.
What is an invoice?
An invoice is a formal payment request that a business sends to a customer once goods or services have been provided. It acts as both proof of the transaction and a way to track payments from clients. Invoices usually specify what was supplied, itemized costs and a payment due date.
Providing clear and precise invoices may play a role in managing your business's cash flow. Invoices can also act as a record if issues about the transaction arise. For small businesses, a consistent approach to invoicing may help reduce confusion and foster trust with customers.
Billing vs. invoicing: What's the difference?
While you may have heard the terms "billing" and "invoicing" used interchangeably, they represent different stages of payment collection:
- Invoicing: Involves preparing and sending the invoice, a formal document listing the goods or services provided and the payment required.
- Billing: Refers to the broader process of requesting and receiving payment, which may include invoicing but also covers other payment collection methods like recurring or point of sale (POS) transactions.
While invoices often act as official records for both parties, billing is an umbrella term that covers all payment-related activities.
Key components of an invoice
Including certain key elements can help ensure an invoice is clear, professional and easy to process. A well-prepared invoice may make it easier for your business to receive timely payments and give the customer the details they need.
Invoices typically include the following information:
- Invoice number: A unique code assigned to each invoice for tracking and recordkeeping.
- Date of issue: The exact date the invoice was created and sent.
- Business and customer details: Full names, addresses and contact information for the business and invoice recipient (adding a business logo may also help with brand and name recognition).
- Description of goods/services: Detailed summary of what was delivered, including amounts and prices.
- Amount due: The total sum owed, with breakdowns for costs, taxes, credits, discounts and upfront deposits if applicable.
- Payment terms: The timeline for payment (e.g., "Net 30" sets payment 30 days from the invoice date).
- Accepted payment methods: How you accept payment, such as ACH transfer, credit card or check.
- Due date: The specific date by which payment should be received.
Some businesses may also include a notes section as a place to include a “thank you” message or other information that may be important.
How to create an invoice
When creating an invoice, small business owners have a few options available. Ranging from free and manual to fully automated and comprehensive, the right choice usually depends on the business's size, budget and volume of transactions.
Options include:
- Word processor and spreadsheet templates: Many newer business owners start with this low-cost, manual option, which requires you to enter the information for each invoice. While it can be a budget-friendly option that doesn’t require complex software, its manual process could result in human error.
- Payment processors and POS systems: If you have a platform that already accepts credit card payments or manages POS transactions, it may already have built-in invoicing features. You can often generate and send an invoice directly from the payment processor's dashboard.
- Dedicated invoicing software: These cloud-based platforms are designed to handle billing and payment without the need for full accounting software. This type of software can often generate professional invoices, track when clients open them and send automated late payment reminders.
- Accounting software: For businesses that need to manage their entire financial picture in one place, full-suite accounting software is often considered a comprehensive option. With these systems, invoicing is one feature of a larger platform that typically also handles expense tracking, payroll and tax preparation. This option may be best for established small businesses, those with employees or those with complex inventory and expense tracking needs.
Benefits of invoicing
Invoices serve more than just administrative purposes. They can play several important roles in small business operations, including tracking financial activity, managing client relationships and keeping your business organized.
Benefits of an organized invoicing process may include:
- Accelerating cash flow and predictability: Clear, accurate and prompt invoicing can encourage more timely payments. When you establish a routine of sending invoices immediately upon project completion, you may be able to reduce or eliminate payment delays.
- Projecting professionalism and building trust: Your invoice is often one of the final touchpoints you have with a client. A well-designed, error-free invoice may signal to your clients that you are organized, detail-oriented and serious about your business.
- Reducing disputes and misunderstandings: Ambiguity can potentially delay payments. By providing a transparent breakdown of what the client is paying for, you may reduce the likelihood of disputes down the line.
- Simplifying tax season and financial tracking: Upholding an invoicing system helps create a paper trail of your revenue. Come tax season, having an organized record may make filing easier.
- Unlocking valuable business insights: When you track your invoices consistently, you can gather valuable data. You may be able to identify which services are your most profitable, which clients consistently pay late and what your busiest seasons are.
- Reclaiming your time: Chasing down late payments can be a drain on your time and energy. By establishing good practices — such as automating recurring invoices for retainers or setting up automated payment reminders — you may spend less time on administrative work and more time running your business.
Invoice best practices
Developing reliable routines for issuing and managing invoices may help your business remain organized and receive payment promptly. You might consider implementing some of the following best practices:
- Sending invoices right away: Sending invoices as soon as you complete the work or deliver goods can help encourage quicker payments.
- Stating clear payment terms: Define when payment should be made and what types of payment you accept. Accepting more types of payments allows customers to pay how they want.
- Automating the process: Use invoicing software to automate sending and tracking, which can help reduce manual tasks and mistakes.
- Following up on overdue invoices: Set reminders to check on unpaid invoices and send polite reminders if necessary.
- Maintaining detailed records: Keep copies of all invoices and payment receipts for future needs, such as taxes or audits.
Building these habits may support steady cash flow and help reduce the risk of missed or late payments.
Frequently asked questions
When should I send an invoice to my customer?
Ideally, send invoices promptly after delivering goods or services, which may promote timely payments and reliable cash flow.
What should I do if a customer does not pay on time?
Reach out with a courteous reminder, review your payment terms and consider adding late fee policies on future invoices.
Can I automate invoicing for my small business?
Yes, a variety of invoicing tools and software are available that can help automate invoice creation, the process of sending them to customers and payment tracking.
How long should I keep copies of my invoices?
Consider keeping all invoice records for several years, following your local tax authority's requirements.
