What is an invoice and what is it used for?

Without an efficient and timely invoicing process, your business won’t be able to operate effectively. That’s why it’s so important that you understand the basics of invoicing and the important role it has in maintaining your cash flow.

In this guide, we’re going to explain what an invoice is, what it’s used for, the different types of invoice you can send and the details you should include.

What is an invoice?

It should contain all the details the customer will need to make the payment, as well as an itemised list of the products or services provided and their cost.

An invoice also serves a secondary purpose. It’s an important document for tax purposes and should be kept as evidence of your income and (where relevant) the VAT you’ve collected on the government’s behalf.

What is an invoice used for?

An invoice serves several different purposes. Those include:

To request timely payment from customers

An invoice provides a formal record of a transaction and includes a due date that a customer’s payment should be made by. After that point, you’re legally entitled to charge interest on the overdue payment.

To keep track of sales

An invoice creates a written or electronic record of a sale being made. That helps businesses to protect themselves and is important for bookkeeping purposes.

To record business revenue for tax returns

Businesses must keep a copy of all invoices for tax purposes. They provide a summary of commercial transactions and help businesses to complete and file accurate tax returns.

To track inventory for businesses selling products

Invoices can be used to track items that have been sold. That can be helpful when it comes to managing and reordering stock. 

Legal protection

Invoices also provide a legal record of a sale. That helps to protect small businesses from fraud and allows them to take action if a customer refuses to pay.

What is an invoice ID?

An invoice ID, also known as an invoice number, is a unique number that’s assigned to every invoice issued by your business. This is a crucial element of the invoice as it allows you to track and easily identify individual transactions with your clients.

What is an invoice number and how do you assign it?

According to the UK government, every commercial invoice you issue MUST include a unique invoice number. You should establish and use a consistent system to ensure no invoice number is used more than once.

Systems you can use to assign invoice numbers include:

• Sequential - Start with any number, usually 1, and assign each proceeding invoice using the next number in the sequence. For example, invoice 001, invoice 002, etc.

• Chronological - The chronological method is to assign invoice numbers based on the date the invoice is generated. You can then add a unique sequential number to differentiate invoices created on the same date. For example, an invoice issued on 30 January 2021 with the sequential number 03 would have an invoice number of 30012103.

• By customer ID - If you assign unique ID numbers to your customers, they can be used on their invoices along with a sequential number. For example, a client with a customer ID number of 210 and a sequential number of 15 would be sent invoice 21015.

• By project ID - It’s not unusual for businesses to assign unique ID numbers to each project. This can be combined with a sequential number to differentiate invoices issued for the same project. For example, the third invoice (03) you issue for project 232 would be invoice 23203.

What does an invoice look like?

A professional commercial invoice should be simple, clear and contain all the necessary information to be legally enforceable and for the customer to make a payment. It should include:

• Your business’s contact information

• Your client’s contact information

• An invoice ID or invoice number

• The payment term and due date

• An itemised list of the products or services provided

• The total amount due

Read our comprehensive guide on how to write an invoice to learn more.

A few additional tips when sending business-to-business (B2B) invoices include:

• Always use the registered business name rather than the trading name of the company you’re dealing with if they’re different. 

• Ask the person you’ve been in contact with if there’s a specific individual or department you should send the invoice to. 

• Ask if there’s a purchase order number that you should include on the invoice. That can help to speed up invoice processing times.

This video tutorial will help you create professional customer invoices in QuickBooks in just a few clicks.

When to issue an invoice

Invoices are most commonly sent to customers or clients after services or products have been provided. However, that can change depending on the type of business you operate and your relationship with the customer. Invoices can be issued:

• In advance - If you have to buy raw materials to fulfil an order or require a deposit, you may invoice the customer before the work is done.

• On the spot - Issuing an invoice as soon as the work is done is common in industries such as the trades and some professional services. This helps to ensure you receive prompt payment. 

After you’ve completed the job - Some businesses allow 24-48 hours before invoicing to ensure their customers are happy with their work, while others invoice at the end of the month.

What is an outstanding invoice?

An outstanding invoice is one that’s been issued but hasn’t been paid yet. This is different to an overdue invoice, which hasn’t been paid by the due date. There are certain terms that relate to outstanding and overdue invoices. They include:

• Deposit required - You can ask for a deposit or downpayment from the customer upfront before the goods or services are provided. That can help to protect you from cash flow issues if a payment is late.   

• Invoice due date - This is the date the payment should be made by and must be included on every invoice you issue. If payment hasn’t been received by the due date, you’re legally entitled to charge interest on the outstanding amount.

• Early payment discounts - Some businesses try to encourage customers to make quick payments by offering discounts (typically 2-3%) if the invoice is paid in full within 7-14 days.

Different types of invoices

There are many different types of invoices that businesses can issue to their clients. The invoice you use will depend on the industry you operate in and the type of customers you have.

How invoicing works

In theory, invoicing is a very simple process that shouldn’t cause businesses too many problems. The invoicing process is as follows:

1. Your customer agrees to purchase goods or services from you

2. You complete the transaction and provide the goods or services as requested

3. You create an invoice that includes the details of the transaction and amount due, and send it to the customer

4. Your customer processes the invoice and arranges to make the payment by the due date.

5. The due date arrives and the payment is made in full.

Unfortunately, the process doesn’t always go quite so smoothly. Finding the time to invoice, getting clients to make payments on time and chasing them when they don’t can be some of the most frustrating aspects of running a business. That’s where our invoicing software can help.

Why use invoice software?

With QuickBooks’ invoicing software, you can create professional and personal invoices using customisable templates, track payments in real time, send automatic reminders and give your customers more ways to pay. That makes invoices and payments easy to send, manage and accept so you can concentrate on other things - like running your business.

Invoicing and more made easy

We hope this blog post on understanding invoices has been helpful. Want to learn more about how to make your small business shine? Check out our blog for more useful posts.