Invoices are one of the most common financial things in the business world. There’s every chance you’ve been issued an invoice as a customer, but what do you need to know about them from the perspective of a business owner?
Firstly, what are they and how do they work? Secondly, does your business need to create and generate invoices? Both of these questions will be asked in this guide as we help you understand everything you really ought to know about invoices.
What are invoices?
An invoice is a document that informs both you and your client what they have purchased from you. To many of you, this might sound like a bill. However, an invoice is different in that it specifies a few key things.
Firstly, it details what the client purchased from you. If they purchase a service, the invoice will stipulate exactly what work you will provide. Alongside this, the invoice states when they purchased the product/service from you, and at what price. It will also say what quantity they purchased, depending on what they bought from you.
One of the main things that makes an invoice unique is that you should provide instructions on how and when the client should pay. These are also known as the payment terms, and they help you take legal action against any customers that refuse to pay.
How do invoices work?
Invoices work in a very simple way as they are basically just a request for payment. When a transaction is made, you can generate an invoice and send it to the customer. You can use free invoicing software to do this, meaning that these documents are automatically made with each purchase. This will take a lot of the stress out of your hands as you don’t have to keep physically creating invoices all the time. Your invoice can then be emailed to the client, informing them of what they need to pay.
From here, the customer will have to pay you via the agreed-upon means – and by the date stated on the invoice. That’s all there is to it!
What are the benefits of invoices?
Why would a business want to use invoices? Well, they can provide you with a host of benefits:
- Keep track of your finances – One of the underlying uses of invoices is to keep track of your financial records. Every invoice that’s issued will help you know how much money you are owed. As a result, you can go through all of your paid invoices to count up how much money you’ve generated over the course of a tax year. Likewise, you can see how much money you’re owed from invoices that haven’t been paid, ensuring you get that money right away.
- Legal protection – Hopefully, you never get into a legal dispute with clients. However, there are times where this might happen. A common example is where a client won’t pay up because they claim you haven’t provided what they bought. In this case, your invoice can act as a way of proving that you have held your end of the bargain. You’ve provided the service exactly as stipulated on the invoice, so the customer legally has to pay you.
- Improved professionalism – Another underrated benefit of invoices is that they can make your business look more professional. When you provide a service to a customer and send them an invoice, it instantly makes you seem more trustworthy and professional. The customer is likely to have a higher opinion of you, rather than if you just turned around and asked for a cash payment. Running a business is all about maintaining a level of integrity and professionalism; invoices can help you do just that.
- Reduce late payments – Invoices can also help you reduce late payments from customers. Giving them a copy of an invoice ensures that they know what they have to pay and by when. As a result, you can also send follow-up invoices if you haven’t received the money on time. Often, clients don’t mean to make late payments, they just forget. A simple invoice can prevent this.
Does your business need invoices?
Having read all of the above, you are starting to recognize how important invoices are to modern business. But, does this mean every single business needs to use them?
In short, no.
Your business might not need invoices depending on what you do and what you sell. Primarily, they are used in B2B circumstances. Here, you are usually selling services to other businesses, so an invoice comes in handy. Likewise, they are used in B2C circumstances as well – but mainly when services are offered. For example, if you run a construction company, it’s common to send your customers an invoice after you have completed the work. Let’s say you build an extension for someone’s home, you’d send an invoice after telling them how much they owe you.
For many other businesses, invoices aren’t necessary. As an example, what if you run an eCommerce business that sells products online? Here, invoices aren’t needed because payments are made when someone makes a purchase, often before they receive it. Generating an invoice is pointless as it tells the customer of something they’ve already done.
Ah, but there’s a problem! Without invoices, how will you keep track of payments and transactions? It’s simple, you use receipts instead. Effectively, these documents detail a sale after the payment has been received. An easier way to think of it is that receipts are proof of transactions, while invoices are demands for payment. With a receipt, both you and the customer have a record of the transaction, and you can still collect your receipts to figure out how much money you’re making.
In summary, invoices are a useful financial document for many types of businesses. If you provide services or products that aren’t paid for right away, you should use invoices. They are a way of requesting money from clients, and they also outline the payment terms. Hopefully, this post has helped you realize if your business can benefit from invoices, or if you don’t need to worry about them.
