Though invoices are a very well-known tool commonly used by all businesses, they are often regarded as simply a process to be paid. It is essential to ask the question of “what is an invoice”, especially as a smaller business in order to best use the tools at hand. With that in mind, this guide is intended to be used as a handbook of sorts with all things in mind, there to refer back to for all invoice-related questions. 

What is an invoice

An invoice is an agreement between two parties for the payment and provision of goods or services. Invoices are not a legally binding document however and are seen as more of an agreement. This does not however mean that invoices are optional, as the debt that is stated on an invoice can be recovered through legal action.

All businesses that trade use invoices in some fashion. Even retail websites which sell online often provide an emailed receipt, which is an invoice as it is a record of the transaction with all relevant information. This comes to the recipient in the form of a digital invoice, however, which is outdated for use by small businesses, with the better alternative being e-invoicing.

What must be included on an invoice

As per government regulation, invoices will not be valid unless they include the following:

What is e-invoicing

E-invoicing is the current, more technologically advanced way of invoicing with ease. It allows the usage of mobile apps such as i24 to create invoices that are sent via an electronic format. The benefits of e-invoicing over digital invoicing are as follows:

• It decreases the risk of errors on invoices.

• Instant payment becomes easier and more viable.

• Invoices are less prone to outside interference.

• Invoice processing becomes simpler.

• Transactions are automatically logged.

• Payments are automatically chased.

These benefits highlight why e-invoicing has become critical for small businesses or standard digital invoice methods.

The various invoice types

Final invoice

Final invoicing methods are the most common type of invoice for businesses of all sizes. A final invoice is sent when the goods or services are provided and no sooner as opposed to paying beforehand as with other invoice types. This is seen as the most professional method of invoicing and an industry standard. Furthermore, as it shows trust in clients to the fullest extent, it helps greatly in maintaining client relations.

Interim invoice

An interim invoice is used primarily by service-providing professionals to bill for segments of a project. They are commonly used to cover the costs throughout a project so that you don’t need to find more work before finishing the current job. It also helps to create a more healthy cash flow balance due to not getting one large lump sum after a no income period.

Recurring invoice

Recurring invoices are very similar to interim invoices in that they are sent multiple times, the difference being that recurring invoices are sent for the same job, multiple times. They are used to pay sole traders similarly to employees of a business without having to employ said sole trader. An example of where this might be used is something like a blogging job, where you are paid monthly for a certain amount of blogs to be produced.

Pro forma

A pro forma invoice is used to invoice a client before giving goods or services. The purpose of this is often to pay for anything required for the completion of the job. This might include the services of a separate sole trade or purchased goods such as software or computer hardware. A partial pro forma invoice is sometimes used to provide the necessary payment needed before a job starts to complete said job while withholding some payment till completion.

Payment terms

Payment terms refer to the conditions an invoice must be paid under. They most often refer to the maximum time frame allowed for an invoice to be paid.

Upon receipt

“To be paid upon receipt” is used to let a client know that an invoice should be paid upon them getting it. This is what’s called an instant payment term, and is only reasonable within e-invoicing due to ease of access and built-in card payment methods. Digital invoices use this less effectively as they can be rectified over a period of days or months, and expecting someone to be on their email awaiting an invoice is not reasonable.

Net payment terms

A net payment refers to the common usage of terms such as net30. In the example of net30, this would mean that the payment for an invoice is due 30 days after the end of the current month. Other payment terms of extreme similarity exist such as net7, net14, net3 and so on, all specifying the days. These are used by businesses trading with other businesses primarily.

PIA (pay in advance)

Pay in advance is exactly how it sounds. It refers to clients paying for goods or services before receiving them. This would be exclusive to proforma and interim invoices as the only invoice types which would make use of this payment method.

End of month

End-of-month invoicing is exactly as it sounds, however, there are some complications to this payment method. The main problem with this is that as the months come to a close, people receive less time to pay their invoices. This can be avoided by assuming that at the final 7 days of a month, the term should carry over. This term is limiting in the invoice types that make effective use of it, the main one being recurring invoices.

Enforcing payment terms

It’s not an uncommon occurrence for invoices to go unpaid for longer than expected. This isn’t preferable and preventative measures should be put in place to avoid it at all costs. This is because late payments create pay gaps, and make for an unhealthy cash flow.

Provide discounts

It’s not uncommon for an invoice to include a discount for early payments. Yes, you lose a small amount of pay if they do pay early, but this is in exchange for a healthier cash flow and general earlier payment. The terms don’t have to extend for weeks, something simple such as if they pay instantly, they get a discount works.

Accumulating interest

One of the most effective strategies for enforcing a payment term is letting the client know that any unpaid debts will accrue interest. Because of the implications behind this, however, such as heavier legal action and of course a larger debt, it’s common for clients that cannot pay to simply refuse the contract. This makes it an effective way to avoid potentially harmful clients.

Remind the client

Simply reminding the client of the remaining debt is often an effective strategy. Many businesses of all sizes buy and sell invoices often, it isn’t difficult to lose track of a few. A kind reminder can be a way to not only rectify the cash flow but also show trust between yourself and the client.

Incorporate various payment methods

Businesses that offer more options to their clients often get paid quicker, and more reliably. An easy way to incorporate various payment methods is switching to E-invoicing methods. This way, you can allow payment through methods like google pay, debit, credit, etc.

Charge late payment fees

Having a solid payment fee for late payments is a certain way to improve cash flow. This method allows you to weed out potentially harmful clients, similar to accruing interest. This method works best with smaller payments and general clientele, rather than with other businesses. This is as the fee is often an amount of the original payment, and asking for hundreds extra over a late payment is not reasonable.

Each method listed here should be used only after the client has been contacted at least twice. This prevents any allegations of scamming due to the client not understanding the situation.

Retrieving late payments

When things go wrong, it can be the case that businesses need to take action to retrieve payments. Cases, where this might apply, would be where clients are simply refusing to pay, or they have failed to pay for other reasons, even something like a lack of funds. As a result, all businesses should understand the options they have when recovering payments.

Legal action

The process of taking legal action when a client won’t pay is as follows:

• Make a clear demand for payment before taking any action, often times this might be the push a client needs to pay.

• Start organizing for court proceedings, leading eventually to a court hearing where you can bring the case before a judge.

• Finally, find amicability during the court proceedings, where a resolution to the debt in some form has been found.

This process will almost definitely destroy any relations between yourself and a client. Use it as a last resort or not at all.

Invoice factoring / selling invoices

Businesses that have invoices that are still pending can sell said invoices to an external company for a majority of the price instantly. This is known as invoice factoring and is commonly used as a way to move long-time outstanding invoices from accounts payable, as well as improve cash flow quickly.

Utilizing invoices

Invoices have the potential to go far beyond the scope of simply receiving payment. Every paying client gets an invoice, and each one is logged, meaning there is potential to use them effectively throughout a business. Here are a few example of effective and simply ways invoices can be used.

Invoices as marketing tools

There are various strategies that utilize invoices as marketing tools, making effective use of word of mouth, and persuading paying customers to come back. Knowing exactly how to use said strategies whilst remaining professional is key to using invoices effectively.

Providing discounts

Discounts for future purchases are a reliable way to draw customers and clients back. By offering deals limited by time, you can even use it as a way to keep cash flow steady. One final benefit is that clients might offer discounts to new customers, therefore spreading your business further.

Requesting reference

Simply putting at the bottom of an invoice that a reference would be appreciated is often overlooked, even though it is useful for generating leads. All invoices should be used as an opportunity in this way as it allows for easy marketing with no effort.

Displaying other services

It’s a common misconception that displaying services that are available on an invoice is unprofessional. This is not the case and should be done in all scenarios that can so the client has an idea of future requests they can make of the trader.

Predicting future sales

You can use previous invoices to predict the future income of a business. This can be done by paying attention to trends in previous sales periods and using the data to calculate the average. This can then be applied and built upon throughout later sales periods in order to continue to be able to predict an average earnings amount.

This use is also particularly useful as it is an example of something that be used as evidence for shareholders.

Protection in a dispute

Invoices are very useful when it comes to protecting yourself. It is not underhead of for a client or customer to simply deny the transaction. Without an invoice at least being sent, there is no proof of it and they can claim this easily. For small businesses and sole traders, this is especially important as it’s more common at that size of business.

Using the i24 app to invoice

The i24 app has been made, remade, and remade again for the benefit of clients, whilst earning nothing. The app continues to go through a rigorous improvement cycle even now for the benefit of both creating professional and useful invoices, and introducing businesses to the ease of e-invoicing.