What is an invoice?

What is an invoice?

An invoice is a specialized document given to the buyer by a seller in order to collect payments. It involves the cost of products purchased or services offered by the seller. Invoices can be used as legal documentation if they involve the seller/buyer names, description of goods/services charges, and payment terms. In case the goods/services were availed on credit, the invoice usually highlights the deal terms and offers data on payment methods that are available.

Invoicing is the process of sending an invoice to the customer that exhibits all products/services offered by a company and the breakdown of charges for each item. The invoicing process is crucial for the accounts receivable process and also the billing cycle. For any business seeking revenue generation opportunities, it is critical to invoice customers accurately and effectively.

The main components of an invoice involve details of items, quantity bought, price per unit, and total of all goods and services provided alongside any applicable tax/delivery charges. An invoice is the evidence of purchase for both the buyer and the seller. Moreover, customers are liable to pay as per the terms of the invoice.

What are the main functions of invoicing?

Requesting payments, maintaining records and tracking payments, business analysis, legal protection, and tax convenience are among some crucial functions of invoicing. The details of each are as follows:

Payment requests

One main function of invoicing is to make a request for payment of goods/services provided by the seller. It works as a receipt and depicts the proof of purchase from the seller. Moreover, invoicing aids in record keeping, which can be helpful in the long run for managing accounts receivable.

Record maintenance/payment tracking

Invoices aid in keeping legal records for a sale of a good/service. Businesses require invoices to keep track of payments received and ascertain in-time due payments based on any terms outlined in the initial contract with the buyer.

Business performance evaluation

Analyzing invoices can help businesses gather information from their customers. It offers insights on buying patterns and identifies trends, popular products, peak buying times, and more. It helps to develop effective marketing strategies that can translate into a high number of buyers.

Legal protection

A correct invoice is lawful evidence of a mutual agreement by the seller and buyer on a fixed price. It shields the merchant against fake lawsuits.

Easy tax filing

Recording and maintaining all sales invoices helps the company report its income and ensure that it is paying the proper amount of taxes.

What are the types of invoices?

Pro forma invoice, sales invoice, overdue invoice, consolidated invoice, retainer invoice, interim invoice, timesheet invoice, final invoice, mixed invoice, commercial invoice, and recurring invoice are among the different types of invoices.

Here is a detail of each of the mentioned types.

Pro forma invoice

It is an invoice sent by the seller. A pro forma invoice is a preliminary bill sent by the seller to the buyer before shipping goods or providing services. It outlines the estimated costs, delivery timelines, and other key details about the transaction. The buyer reviews the pro forma invoice and approves it before the seller proceeds with the order. This document typically includes information such as

• Items being sold
• Quantities and prices
• Expected delivery date
• Shipping address

The pro forma invoice serves as a confirmation of the sale terms and allows the buyer to verify the details before the seller starts working on the order. It’s a crucial step in the sales process, ensuring both parties are on the same page.

Sales invoice

A sales invoice gets sent to a buyer to request payment for a product or service. It has spaces for seller details, buyer’s address, date of delivery, terms of payment, products and their prices, and the price in total; it also includes details that can be used by the buyer to make the payment, including bank information and links for payment. After the payment is made, the invoice serves as a legal document of the transaction. To find out about this in more detail, here is a guide to invoices.

Example:

After Nova Containers has finished manufacturing 1000 glass jars, they need to collect payment from the buyer before shipping the goods. Nova Containers can send an invoice that contains the total amount owed to them, $2500, along with their bank details so the buyer can make the payment.

Overdue invoice

An invoice past its due date can be referred to as an overdue invoice. When an invoice is sent, a due date for payment is often mentioned on it. In case the buyer fails to fulfill payment within the due date, the sales invoice becomes overdue and the buyer is considered a defaulter. The seller can do any of these:

• Either send payment reminders and notifications about late fees
• Initiate a legal action
• Waive off the invoice.

As an example, let us suppose Cloudify, a software-as-a-service provider, sends an invoice to its customer, TechCorp, for $1000, with a due date of May 15th. However, TechCorp fails to make the payment by the due date. The invoice becomes overdue, and Cloudify can take action:

• Send payment reminders and notifications about late fees (e.g., 2% interest per month).
• Initiate legal action to recover the debt.
• Waive off the invoice (if, for instance, TechCorp is a long-term customer with a good payment history).

Consolidated invoice

It is a type of invoice that gathers existing invoices under the same customer’s name and combines them into a unified invoice depicting a grand total amount. It saves time for the buyer and allows a hassle-free payment experience.

Retainer Invoice

A retainer invoice is the one sent to the buyer for payment collection for a task that will be accomplished in the near future. Any amount mentioned in the retainer invoice is paid by the client to access a business service as needed in the near future.

Interim invoice

These invoices constitute partial billing cycles where a subset of the total project fee is invoiced before completion, thereby facilitating cash flow management and coverage for operational expenses. This type of invoicing is often employed in large-scale projects where the aggregate invoice is segmented into manageable interim invoices.

Timesheet invoice

These invoices are employed when businesses charge clientele according to the number of hours employees served on a project. These are used in service-based industries, defining per-hour charges multiplied by total hours worked on a project.

Final invoice

It is the last bill sent after project completion, calculating the total amount owed by deducting previous payments from the total project cost.

Mixed invoice

A mixed invoice consolidates both credit and debit adjustments, thus resulting in a net amount due, either to the buyer or seller, depending on the calculation.

Commercial invoice

It is proof of an international transaction between a buyer and seller for legal reasons. It can help in tariff calculation, tax determination, and obtaining customs clearance for shipping goods in and out of a country.

Recurring invoice

A recurring invoice is an invoice sent on a recurring basis to customers for rendering products or services repeatedly. These invoices are often sent on a monthly, weekly, or annual basis. The customer must, however, pay the invoices on time for uninterrupted access to products/services. This type of invoice is often employed in subscription businesses, gyms, internet providers, music and streaming services, and relevant SaaS products.

For example, Netflix sends recurring invoices to its subscribers every month, charging $13 for unlimited access to the content library. The invoice is sent on the first of every month, and payments are required to maintain access to the service.

What are the benefits of invoice automation?

Invoicing automation can help by processing invoices faster, reducing errors, maximizing visibility, and more. Here is a detail for each of the mentioned benefits:

Fast processing of invoices

Invoicing manually can be arduous, as it may take weeks to charge customers for products/services used. An automated invoice can reduce manual intervention and error risks.

Error reduction

Manual data entry can result in erroneous outcomes owing to miscalculations, lost invoices, and errors in processing invoices. Automation can help improve accuracy and figure out any errors in the invoicing process.

Clarity into revenue and cash flows

Manual filing of invoices can lead to a lack of clarity into underreported expenses, incomplete accruals, and inefficiencies in the billing process. Using automated invoices, businesses can gain visibility throughout the process chain with real-time data on billing processes.

How can SubscriptionFlow help with invoicing?

SubscriptionFlow provides invoice automation, tracking invoices, support for complex invoices related to various pricing models, real-time analytics, and subscription lifecycle management. Here is a detail of each:

Automated invoicing

Subscription businesses can automate invoicing using SubscriptionFlow. It involves payment collection, renewals, refunds, payment recovery, accounts management, and expansion.

Invoice tracking

Businesses can track down invoices generated and any payments collected on a given date. It renders clarity of cash inflows and outflows. Businesses can also keep a close check on any pending invoices via the admin dashboard.

 Support for complex billing

The subscription management software also supports complex invoicing cases where various pricing models are incorporated. It can include usage-based plans, tiered pricing, and prorated billing.

Real-time analytics

The software automates subscription and recurring billing processes with advanced integrations and allows merchants to manage invoicing and payments easily. It also showcases real-time analytics and allows carefully curated policy making and strategic decisions for business progress.

Dunning management

Using SubscriptionFlow, dunning features can be used to minimize revenue loss from any failed payments. The platform allows retaining customers to reduce churn and revenue leakages.

Proration

This platform optimizes customized solutions for billing customers, offering proration, easier upgrades/downgrades in subscription plans, and also aids activation or cancellations. Sophisticated billing requirements are easily dealt with using this platform’s advanced billing and invoicing solutions.