What is an invoice? What businesses need to know

  1. Introduction
  2. What is an invoice?
  3. Who uses invoices?
  4. Key components of an invoice
  5. How to send an invoice
  6. How to pay an invoice
  7. How Stripe supports invoicing for businesses

Invoices are central to business, serving as an important conduit for cash flow, financial accounting and tax compliance. They’re also one of the many administrative tasks businesses have to attend to regularly.

While invoices are often perceived to be a simple piece of administrative paperwork, they can significantly affect business relationships and a company’s bottom line. Understanding the concept, utility and potential pitfalls of invoicing will help businesses improve their financial operations. This will be especially true as more businesses expand to new markets and deal with increasingly complex payment models, customers, contractors and vendors.

Below, we’ll discuss the key elements and functionality of an invoice, providing you with the knowledge you need to simplify your business’s financial operations and make the most of every transaction.

What’s in this article?

  • What is an invoice?
  • Who uses invoices?
  • Key components of an invoice
  • How to send an invoice
  • How to pay an invoice
  • How Stripe supports invoicing for businesses

What is an invoice?

An invoice is a commercial document issued by a seller to a buyer to request payment. It provides an itemised summary of products or services rendered, along with the amounts due for those goods or services, and it can serve as a legal record of a transaction.

Invoices are important for financial accounting and tax reporting. They help businesses keep track of sales, monitor the flow of goods and services, manage cash flow and create financial reports. They also help businesses maintain audit trails and adhere to compliance regulations.

Who uses invoices?

Invoices are used by a wide range of entities involved in the exchange of goods, services and financial transactions. Common examples of entities that frequently use invoices include:

  • Businesses
    Almost every type of business may use invoices, regardless of its size or industry. Whether it’s a multinational corporation or a small local shop, they all issue invoices to their clients or customers as a standard procedure after providing goods or services.

  • Freelancers and independent contractors
    Freelancers and independent contractors often use invoices to bill their clients for the services they provide. These invoices usually include details about the service performed, the time spent or quantity delivered, and the agreed-upon rate.

  • Government bodies
    Government agencies often use invoices with vendors. This might include anything from procuring office supplies to contracting major infrastructure projects.

  • Non-profit organisations
    Non-profits, though they may not engage in traditional commercial activity, often use invoices when they receive services from vendors or when they provide services for a fee.

  • Service providers
    Professionals such as lawyers, consultants, accountants and doctors often issue invoices to clients to bill for their time or the services that they have rendered.

  • Wholesalers and manufacturers
    In B2B transactions, wholesalers and manufacturers use invoices to bill retailers for goods shipped.

  • Educational institutions
    Schools, colleges and universities may use invoices to bill students for tuition, housing and other fees.

Any entity that provides goods or services in exchange for payment can use invoices to list the transaction and request payment.

Key components of an invoice

An invoice typically includes several key components that provide detailed information about the transaction. Here are the primary elements often found in an invoice:

  • Invoice number
    This is a unique identifier for each invoice. It's important for record keeping and can help both the seller and buyer track payments and refer to the transaction in any future communications.

  • Date
    This is the date when the invoice is issued, and it can help determine the payment due date. For example, if the terms are "net 30 days", that means the invoice is due within 30 days after the date it was issued.

  • Vendor information
    This includes the name, address, contact information and sometimes the tax identification number of the seller or service provider.

  • Customer information
    Similar to the vendor information, this includes the name, address and contact information of the buyer.

  • Description of goods or services
    This section contains a detailed description of the products or services provided, including quantities, unit prices and line totals. It should be detailed enough that the buyer can easily understand what they are being charged for.

  • Subtotal
    This is the total cost of all the goods or services before any taxes, discounts or additional fees are applied.

  • Taxes, discounts and additional fees
    If applicable, the invoice will list any taxes, discounts (such as early payment discounts) and additional fees (such as shipping or handling fees). Each should be itemised separately and then added or subtracted from the subtotal.

  • Total amount due
    This is the final amount that the buyer is required to pay. It's calculated by adding all charges, including taxes and additional fees, and subtracting any discounts to the subtotal.

  • Payment terms
    This section outlines the agreed-upon payment terms, including the due date and preferred payment methods. It may also specify penalties for late payment.

  • Notes
    Some invoices include a section for notes where the seller can add additional information relevant to the transaction or a personalised message to the buyer.

The specific components may vary based on the nature of the business, the complexity of the transaction and local regulations or customs. However, these elements are generally consistent across most types of invoices, and many online word processors provide invoice templates.

How to send an invoice

Sending an invoice involves several steps that ensure smooth transactions and timely payments. Here's an overview of the process:

  • Prepare the invoice: First, you need to create the invoice. This includes gathering all the necessary information, such as the details of the goods or services provided, the cost, the customer's information and your business information. If you're issuing invoices frequently, use invoicing software that can automate this process and help you manage invoices more effectively.

  • Review the invoice: Before you send the invoice, review it for any errors. Make sure that all information is correct, especially the cost of goods or services, the customer's information and the due date. Mistakes can lead to delays or payment disputes.

  • Send the invoice: How to send an invoice depends on the nature of your business and your relationship with the customer. For instance, if you have a digital business, it might be best to send invoices via email, in which case, it's best practice to send them as PDFs. If you have a more traditional brick-and-mortar business, you might opt to send a physical copy. Some businesses also use invoice delivery services provided by invoicing software or platforms. Whichever method you choose, ensure that the invoice reaches the correct person or department responsible for making the payment. Some businesses ask customers to sign invoices, but this is not required.

  • Follow up: Customers often miss an invoice or delay payment. Follow up regularly until you receive the payment. You might send a reminder email a few days before the invoice is due, and continue following up at regular intervals if the payment is late.

  • Receive and record the payment: Once the customer makes the payment, you should record it in your accounting system. This will help you keep track of your cash flow and financial health. Keep the invoice and payment record for tax purposes and potential future reference.

  • Handle late payments: If a customer fails to pay an invoice on time, you'll need to decide on the next steps. This might include charging a late fee, pausing services or seeking legal action in extreme cases. Your actions should be consistent with the terms outlined in the invoice and any contracts or agreements you have with the customer.

How to pay an invoice

Paying an invoice involves several steps that ensure smooth transactions and proper record keeping:

  • Review the invoice: Once you receive an invoice, review it carefully. Confirm that all the details are accurate, including the products or services delivered, their quantities and the prices. Make sure that the vendor or supplier information, invoice number and date are also correct.

  • Verify receipt of goods or services: Confirm that you have received the goods or services for which you are being billed. If there are discrepancies, contact the vendor promptly to discuss and resolve the issues.

  • Check the payment terms: Pay attention to the payment terms specified in the invoice, including the due date and the preferred payment methods. Some vendors offer discounts for early payments, so you might want to take advantage of that if possible.

  • Prepare payment: Once you’re ready to pay the invoice, you need to process the payment using the method specified by the vendor. This could be a bank transfer, cheque, credit card payment or any other method agreed upon.

  • Send payment: Send the payment as per the instructions given in the invoice, making sure that you do so before or on the due date to avoid any late fees or penalties. If the payment is electronic, record the transaction ID or any other identifier that can be used to track the payment.

  • Record the payment: After making the payment, record it in your financial accounting system, marking the invoice as paid. This will help you keep track of your expenses, maintain accurate financial records and manage your cash flow effectively.

  • Retain copies of invoices and payment receipts: It’s important to keep copies of all paid invoices and payment receipts for tax purposes, audit trails and future reference. They can also be helpful in resolving any disputes or misunderstandings that may arise later.

  • Communicate with the vendor: If you have any queries or issues regarding the invoice, communicate them to the vendor as soon as possible. Also, it’s good practice to notify the vendor once the payment has been made, especially if the payment method doesn’t automatically notify them.

Ensuring that you pay invoices promptly and accurately is not just a matter of good financial management; it also helps in maintaining positive relationships with your vendors and suppliers.

How Stripe supports invoicing for businesses

Stripe Invoicing provides robust features for creating, sending and managing invoices for businesses:

  • Invoice creation
    Stripe allows businesses to create professional, customisable invoices. You can add your logo, include a personalised message and modify the invoice to suit your business needs.

  • Automated invoicing
    You can automate the entire invoicing process with Stripe. This includes implementing recurring billing for subscriptions, automatically calculating taxes, applying discounts, and even automatically sending reminders for unpaid invoices.

  • Flexible billing
    Stripe supports various billing models such as per-seat pricing, metered billing, tiered pricing and more. You can customise your billing to fit the nature of your products or services.

  • International invoicing
    Stripe supports invoicing in multiple languages and currencies, which is particularly useful for businesses with international clients. It also supports local payment methods across different countries.

  • Payment collection
    Stripe provides a secure payment portal where clients can pay their invoices. Customers can use credit cards, debit cards and other popular payment methods to pay their invoices. Stripe also supports ACH payments, wire transfers and cheques for USD invoices.

  • Invoice tracking
    With Stripe, businesses can easily track their invoice status. The platform notifies businesses when invoices are paid, and it keeps a history of all invoices and payments, which can be useful for financial accounting and auditing.

  • Integration
    Stripe’s invoicing feature can be integrated with other tools and software that businesses use, such as accounting software, CRM systems and email marketing tools. This integration helps streamline business operations.

  • Security
    Stripe follows stringent security measures to protect sensitive financial information. It is PCI compliant, meaning that it adheres to the Payment Card Industry Data Security Standard for handling card payments.

These features make Stripe a flexible and powerful tool for managing business invoicing, helping businesses save time, reduce administrative tasks and ensure the accuracy and timeliness of payments. Speak with an expert to find out more and get started.

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