The Fundamentals of Invoicing [Free Invoice Template]
You know how they say: “Turn your passion into your profession and you'll never work a day in your life?” Well, being able to spend most of your time on your hobby by turning it into your job sounds very nice.
The difference between a hobby and a job is getting paid. So, you need a smooth invoicing process, in addition to organizing your projects accordingly.
In this article, we explain the fundamentals of invoicing, including an overview of different types of invoices and why they are important. Furthermore, we offer easy-to-use invoice templates that you can download for free!
An invoice is a document that specifies the products or services that a business has delivered to a client. It lists the items of a commercial transaction between two parties.
In legal terms, you are creating a claim for payment by generating an invoice. When done according to the guidelines, this creates an account receivable for your business that is legally enforceable.
Invoices are created by the party that wants to receive payment for the products or services provided to another party. There are many different types of entities that create invoices.
Some examples include:
Besides the different types of entities that provide products or services, there are also different types of employment for these entities that influences the invoicing process. For example, the process looks quite different for large corporations than small/medium-sized businesses.
There are also some differences between invoicing for self-employed individuals and freelancers.
Invoices for self-employed individuals
Somebody who is self-employed provides a certain product or service to customers as a business entity. For example, a shoe repairman who advertises his service and provides it in his shop. They don’t work for an employer, so they can define their business processes themselves. They are also able to hire employees when their business starts to grow.
However, you don’t need to have a business location to be self-employed, as you could also come to customers’ homes. Think of a babysitting service or a plumber for example.
Somebody who is self-employed will request payment by sending an invoice to the customer. Usually, they are created by the self-employed individual themself as they have personal contact with the other party. The shoe repairman will obviously charge a fixed price for a certain repair, while the babysitting service is likely to add the number of hours worked onto the invoice. This largely depends on the industry.
Invoices for freelance work
There are a lot of similarities between self-employment and freelance work. A freelancer is in fact self-employed. The difference for freelancers is that they agree to work on various jobs tailored to the needs and wants of different types of customers. They also work alone, and can’t employ other employees.
A good example is a freelance journalist who receives a request to write a certain article for a magazine. There are also a lot of freelance software developers and other creatives as companies often need them for short-term projects.
Typically, a freelancer will charge an hourly rate, adding the total to the invoice. They have the freedom to discuss beforehand whether they would rather receive a day rate or a fixed rate for the project. Again, this usually depends on the industry.
Invoices for corporations and small/medium-sized businesses
For large corporations, the invoicing process is entirely different, as there is usually an accounting department that deals with this. These are not the same employees who provide the actual service or produce the goods that are sold.
Because of the size of the operation, it’s important for corporations to have an efficient system in place to keep administration organized. Cross-department collaboration is necessary to make sure the accounting department has all the data they need to send out invoices.
In smaller companies, the amount of structure needed varies. When companies start out, members of a small team all tend to contribute to multiple processes within the business. Before an organization starts to grow, there is usually no specific team(member) that is responsible for invoicing. Sometimes these companies are made up of a team of experts who invoice clients for the work they carried out individually, or the project manager does this.
Either way, small/medium-sized companies really need a system in place to track the invoicing process. With employees always jumping onto the next project which takes up most of their time, it’s quintessential to have a project management tool with an invoicing feature to track which invoices are sent, paid, or outstanding.
Another similarity with self-employed individuals and freelancers is that the method of invoicing depends on the industry. A cleaning company will probably charge for the hours worked by the cleaning staff, while an advertising agency will usually send a quote for the whole campaign.
As we now know invoices are sent by the party who wants to be paid for products or services provided, it’s clear that invoices are for the party that has received the products or services.
There are different types of entities that receive invoices. A customer can receive goods from a company, but it could also be another company that places an order. It doesn’t really matter which entities are on either side of the transaction, as long as the information on the invoice is in accordance with the guidelines.
If a customer makes a purchase, the invoice is basically a receipt for the customer. However, for a sale between two companies, the invoice creates an account receivable for the selling company, and an account payable for the buying company. The invoice has a different function, so it needs to include more information. This way it can be processed by the accounting department.
Very simply put, invoicing is important because you need to get paid! As mentioned before, an invoice is proof of a transaction and is therefore legally enforceable. These legal implications provide a sense of security that you will receive payment. But there are many other reasons why a smooth invoicing process is paramount to a healthy business.
The practice of invoicing is one of the most simple ways to show clients you are a professional business. Even when both parties are comfortable with an oral agreement, paperwork always makes things official and more professional.
Maintain a healthy cash flow
Part of being a professional business includes maintaining a healthy cash flow at all times. You have your own expenses and bills to pay, so you need to maintain an adequate level of liquidity. The accounting liquidity of a company is defined as the ability to pay off debts when they are due.
In order to always have enough cash to pay off your own debts, you need prompt payment from those who are indebted to you. Sending out invoices in a timely manner will increase your chances to receive timely payment.
Looking at the different employment types again, we also see varying levels of importance. A large corporation with investors and stockholders typically has more funds to cover expenses, debts, and salaries. Furthermore, the staff’s salaries are fixed and will never be less when sales are lower than normal.
For self-employed/freelancers this is a different story. The number of sales or hours worked, is related directly to the amount of income they earn. They might have the freedom to charge their own fee, but if a freelancer is struggling to find enough jobs, they have less income. This means they have to cut into their own personal savings if they are not able to cover debts with revenue.
Communication with clients
Besides providing a record of the amount due from your customer or client, an invoice communicates so much more information to the other party involved.
By sending an invoice, the customer/client will receive all your contact details, the due dates for payment(s), the payment terms and agreements, and the accepted payment methods.
Maintain an organized administration
Invoicing is an important partthe of administration, as invoices represent the activity within your organization. Firstly, goods or services provided are listed on invoices, which helps you track the total amount of goods sold within a certain time period. This helps maintain your stock levels.
Additionally, tracking outstanding invoices also helps businesses forecast the revenue they can expect within a certain time period. Sometimes large amounts are divided over multiple terms, and a company will need to track when all the installments are due.
It can become confusing to keep track of which invoices are paid, partially paid, or due. Nowadays, you can rely on administration software to keep track of this.
Lastly, staying on top of your invoices will also help you maintain an overview of the amount of business you do with certain parties. This data can be leveraged to generate even more business by proposing special deals to specific clients or pitching your services to them in a certain way.
Ability to forecast sales
Once a company is active long enough to leave a trail of paperwork, there will be enough historical data to base sales forecasts on. By going over all of the invoices sent in the past, a company can answer a lot of questions about their performance.
Just a few examples:
Which type of services or products were sold most?
Which were sold the least?
What is the maximum or minimum amount of hours we should put into a project to make it feasible?
In which periods did we generate more/less income?
All this information will make it so much easier to forecast revenue and set future targets.
Calculate business revenue
Just as easy as it is to forecast future revenue, invoice data is also used to calculate the current business revenue.
This information is necessary to calculate your actual profit, the so-called bottom line. Moreover, you need to record your business revenue in order to correctly handle your tax filings.
Just as when you visit a restaurant or buy a product in a store, you would assume payment is always expected after services or goods are provided. However, this isn’t always the case across different industries.
Invoice per project
Businesses can choose to invoice before or after the services or products are delivered. Most creative companies such as ad agencies or design studios send a quote beforehand, based on an estimation of the project costs. Typically, the invoice with the previously agreed-upon amount is sent once the job is complete, knowing the client is satisfied.
Invoice for hours worked
For some businesses, it makes more sense to charge by the hour. A private tutor is likely to charge an hourly rate for example, as their students decide when they are confident enough or need more tutoring. In the end, the total amount of hours must be stated on the invoice. This process can be optimized by using software with a time-tracking feature, which will allow you to transfer these hours to an invoice.
Request a deposit
Another common practice is requesting a deposit before work is performed or goods are delivered. This option is chosen when a job requires large investments to be made beforehand, or when a company doesn't know the client very well. In this case, an invoice is sent stating the amount of the deposit and another invoice is sent with the remaining amount later.
To make sure your invoice looks professional, keep it simple and clean. Only include necessary information, and refrain from too many embellishments. You can include your company logo and maybe some (colored) titles or blocks to create a nice visual overview.
This might be a no-brainer, but first and foremost it’s important for the document to state the word “Invoice” on the front. This also goes for other statements of debt, which should include the word “bill”, “purchase order”, or “receipt”.
Further elements that must be included on an invoice:
Company name and contact details
Client name and contact details
List of services/products provided or hours worked
Payment due date(s)
Company & client name and contact details
Mentioning the name and contact details of both parties on the invoice is crucial for so many reasons. Without this information, there is no written proof of who the two entities involved are.
It’s also for sheer ease, as the client will know right away who the invoice is from. You also want to ensure they can contact you immediately if they have questions about the invoice, without needing to look up your contact details elsewhere.
Adding contact details such as an address, telephone number, and email also has some legal implications. In some countries adding these details is mandatory as it’s proof that the invoice was sent to the right address. Adding your own details provides proof that the recipient was able to contact you using the correct details too.
Every invoice must have an individual, unique reference ID. Without one, it would be impossible for either party involved to keep track of it. Knowing which invoice ID to refer to, it won’t be difficult to look it up and check whether it’s paid or not. An invoice ID can include numbers and letters, and there are also a few different methods for assigning invoice IDs.
Here are some different methods:
Sequential: The most straightforward way to assign invoice IDs, is to start from number one and assign the next one according to the sequence. You start with Invoice #001, then Invoice #002, Invoice #003, and so on.
Chronologically by date: To sort invoices by date, you can start with the date number and add a unique number behind it. You can use any date format you want. For some companies, it’s very important to be able to sort by date, especially if they have regular clients with a slew of invoices.
Project ID: If your organization doesn’t really have regular customers and usually works on one-off projects, it might be better to assign invoice IDs that include the project name. Yet again, you must add a sequential number behind the project ID in order to differentiate.
Customer ID: Organizations that have a lot of regular clients will benefit greatly from assigning invoice IDs that include the customer name. Instead of the name, you could also create a customer number that you will use. Starting with this, you must add a sequential number behind the customer ID too.
Which method you choose is up to you. It’s just important to consistently stick to one method so you won’t assign the same ID twice. You won’t have to worry about this at all if you use Rodeo, as the highly intuitive invoicing feature automatically generates invoice IDs for you. Furthermore, the system allows you to look up invoices per date, customer, or project.
The date stated on the invoice should refer to the date on which the transaction was completed. Meaning, the date on which services were provided. If the transaction involves the sale of products, you should make a choice between adding the order date, or the date on which the products were delivered/received.
List of services/products provided or hours worked
An invoice should state exactly which services/products the client is indebted for. For clarity, be very specific by describing the type of service, and including the item number for products. When you are adding the hours worked, specify which type of labor this was.
Besides requesting payment, an invoice should stipulate how the payment can be completed. State which forms of payment you accept, which might include cash, bank transfer, credit card, Paypal, afterpay services, or even cryptocurrency.
Payment due date(s)
Make sure your invoice includes the date on which the payment is due. In most countries, you are legally entitled to fine the client if they are late with payment. For very large amounts, you can agree to payment in installments. Just make sure you include all the relevant due dates in this case.
Usually, the final due amount is mentioned at the bottom of the invoice. This is because you might need some space to state the percentage of tax that is added or a discount that is subtracted from the total amount. Some types of invoices must state the VAT percentage, showing the final amount under the bottom line. Discounts could include a bulk discount or any other type of promotion.
Yes, an invoice can be canceled. But because it’s a legal document, you need to follow the correct procedure for this. You can’t just say an invoice is canceled and leave it at that.
As soon as you have generated an invoice, this creates an account receivable for your business. Your bookkeeper won’t be able to make sense of your administration if there are things left unaccounted for. In order to reset an account receivable to zero, you need to issue an official credit note for the invoice.
Besides the standard invoice to request payment, there are several other types of invoices.
Also known as a credit memo, the credit note records that an invoice is partially or entirely canceled. A copy of the credit note is also sent to the recipient of the original invoice. Another reason to cancel an invoice is to change incorrect information such as a wrong amount or the wrong address. The same procedure is also followed to document a refund.
Also known as a debit memo, a debit invoice is specifically used when a business needs to increase the amount they are requesting payment for. For example when a company has multiple outstanding invoices for the same client. A debit invoice will include the full amount that is due by the client, as a reminder of their current debt obligation. Also when slight adjustments need to be made to existing invoices, small companies often use a debit invoice.
Companies that work on very big, long-term projects will often use interim invoices. Sometimes also referred to as progress invoices, an interim invoice requests payment for the portion of a project that is already completed. This allows clients to pay for the work a company is delivering in regular increments until it’s fully completed.
Past due invoice
A client will receive a past due invoice when the original invoice has not been paid on its due date. It acts as an official reminder of debts due, and in some cases will include additional costs. The extra costs incurred by the client will have been communicated beforehand in the payment terms and agreements. Essentially, each outstanding invoice will get labeled a past due invoice once the due date has passed.
This type of invoice is necessary for companies that sell products to international clients. In order to pass customs, commercial invoices must include specific information about the goods. This includes the quantity and description of the products, the weight, total value, and packaging information.
In order to be legally binding, an invoice must include much more information than a receipt. Yet, an invoice can’t be used as a receipt. The most important difference between the two is that a receipt is proof of payment while an invoice is a request for payment. In other words, an invoice is sent before payment and a receipt is generated after.
A purchase order is another separate legal document that is very similar to an invoice. They both contain information about the sale of products. While an invoice is an official request for payment after products have been delivered, the purchase order is already sent once the order is placed.
The buyer sends the purchase order (sometimes referred to as a PO) to the seller, listing the products they want to buy along with the quantity, and agreed-upon total price. The document is legally binding as soon as the seller accepts the purchase order. They are now contractually obligated to deliver the products.
A quote is a document that shows an estimation of the cost for products or services before they are provided. It gives the client the chance to review the costs before they confirm their request for said products or services. Unlike an invoice, it’s not a formal request for payment and doesn’t create an account payable. This only happens once an invoice is sent later. Sometimes when a company isn’t 100% sure about what the costs will be, it is referred to as a pro forma invoice. In this case, it’s also an indication of costs, but with the understanding that it might have to be altered once the project is completed.
These two documents are basically the same thing. The terms are just used differently depending on which side of the transaction the parties find themselves. A business issues a request for payment from the client, naming it an invoice. The client receiving it will likely refer to it as a bill, as it is an account payable for them.
Taking you through all the fundamentals of invoicing, you now probably realize how many factors you need to consider. You need to establish which invoicing method would work best for your business. Will you be sending quotes beforehand? Will you invoice per project or per hour? How will you make sure all the correct information is stated on your invoices to make them legally binding? How will you issue invoice numbers? How will you keep track of which invoices are sent, paid, or outstanding?
So many questions, for which there is one all-in-one solution! Rodeo is an intuitive tool that can replace all of the other tools and systems you use to run your business. You can use it to create budgets, send quotes, plan projects, track labor hours, and view reports. Plus, the invoicing feature will make this process as smooth as possible!
Rodeo allows you to simply transform projects or tracked hours into invoices that can be sent directly to your clients with just one click. Invoices will be numbered automatically and can be customized to your brand. You can even automate recurring invoices for regular customers. At all times, you will have a clear overview of the status of all your invoices.
Whether you are part of a company, self-employed, or working as a freelancer, Rodeo fully optimizes your processes. With the Quickbooks integration, you will be able to send all relevant data to your bookkeeper.
You now know which information should be included on an invoice. But how should it all be positioned? To give you an idea of what an invoice should look like, we are offering a template you can download and use for free!
Would you rather experience the convenience of Rodeo doing all of this for you? Start a free trial today!