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What is an Invoice? A Detailed Guide With Examples

Esther van Opijnen
|
June 5, 2023
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Getting paid for your hard work is the key difference between a hobby and a job. And that's where having a smooth invoicing process becomes crucial. It's not just about doing what you love; it's also about getting paid for it and organizing your projects and finances.

In this article, we will dive into the world of invoicing and how it can influence your financial project management. In the US, it takes ten days to process an invoice manually, but electronic invoicing can cut that down to four days.

Now, level up your invoicing game and turn your passion into a paycheck.

What is an invoice?

An invoice is a detailed record that outlines the specific items or services you've delivered to your client as part of a commercial transaction. It serves as a comprehensive summary of the agreement reached between both parties.

But here's the legal twist: Generating an invoice is not just a mere request for payment; it creates a legitimate claim for the amount owed. 

Following the proper guidelines and ensuring your invoice is accurate and complete establishes an account receivable for your business that holds legal weight. If the need arises, you have the legal backing to enforce payment.

Is an invoice a bill or receipt?

The answer is neither! An invoice is distinct from a bill and a receipt, although they are all related to financial transactions. Let's clarify the differences below.

Illustration of an invoice

Invoices 

An invoice is a document a seller (you) sends to a buyer (your client), providing a detailed breakdown of the products or services delivered and their related costs. It serves as a formal request for payment and typically includes information such as the seller's contact details, the buyer's information, item descriptions, quantities, prices, applicable taxes, and the total amount due. Invoices are typically sent before payment is made and serve as a transaction record.

Related: Tracking Billable Hours? Here Are the Top 15 Tools to Boost Profits

Bills 

A bill is often used interchangeably with an invoice, but it can have slightly different connotations depending on the context. Sometimes, a bill refers to a statement or invoice that a seller sends to a buyer, specifying the amount owed for goods or services. In other cases, a bill relates to a document issued by a service provider (such as utilities or in a restaurant) detailing the charges due for the service. 

Receipts 

A receipt is a document the seller provides to the buyer as proof of payment.
It acknowledges that payment has been received and typically includes details such as the date, payment method, amount paid, a description of the goods or services, and the seller's information. Unlike an invoice or bill, which is sent before payment, a receipt is issued after payment.

How about purchase orders? 

Both documents contain vital information about the sale of products, but there are key differences in their timing and purpose. Unlike an invoice, a purchase order is sent at the beginning of the transaction.

The buyer initiates the process by sending the seller a purchase order (PO). This document specifies the desired products, their quantities, and the agreed-upon total price. It acts as a formal request for the seller to fulfill the order. Once the seller accepts the purchase order, a legally binding agreement is formed, obligating the seller to deliver the products or services.

The purchase order is the initial financial communication between the buyer and seller, detailing the requested products and establishing the contractual relationship. On the other hand, an invoice is generated after the project, serving as an official request for payment. 

The purpose and uses of invoices

Illustration of cash increase

The primary purpose of an invoice is to get paid after delivering the project successfully or after each project phase. Invoices don’t help creative companies with their payments alone.

  • Recordkeeping and accounting: Invoices help maintain accurate financial records.
    They serve as essential documentation for tracking sales, expenses, and revenue. Invoices help businesses manage their finances, analyze cash flow, and prepare financial statements.

  • Legal protection: Invoices create a transaction record and establish the invoice payment terms and conditions of the sale. They serve as evidence in case of disputes, late payments, or legal actions. 

  • Cash flow management: Invoice statistics show that paying on time in the US and Canada has significantly decreased. Efficient invoicing practices can significantly impact your financial stability as a company. Invoices communicate payment terms, such as due dates and acceptable payment methods. To always have enough cash to keep the lights on, you need prompt payment from your clients. Sending out invoices on time will increase your chances of receiving timely payment.

  • Relationship building: Even when both parties are comfortable with an oral agreement, paperwork makes things official. Professional and well-designed invoices reflect positively on your company, showcasing your attention to detail and professionalism. 

Elements of an invoice: What does it include?  

An invoice consists of several crucial components that collectively provide essential information about a transaction. Let's explore the elements of an invoice and their significance:

1. Contact information

Illustration displaying area on an invoice to enter contact information

This might be a no-brainer, but first and foremost, it’s important to state the word “Invoice” on the front.

The invoice should feature the company's name, mailing address, and primary contact information. By including the name of your contact at the company, you ensure that the invoice reaches the appropriate person and increases the chances of prompt payment.

Adding your company’s 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 details proves that the recipient was able to contact you using the correct details too.

2. Invoice ID and date

Illustration displaying area to include ID and date on an invoice

Every invoice must have a unique reference ID. Without one, it would be impossible for either party to keep track of it. An invoice ID can include a combination of numbers and letters.

While it is not necessary to assign invoice numbers sequentially, it is important to maintain consistency to avoid duplications and bookkeeping errors. 

Once the buyer's accounts payable department processes and pays the invoice, it indicates that the original purchase order has been fulfilled, and the transaction is considered complete. The invoice number serves as a confirmation and reference for this closure. 

By referencing the invoice number, both parties can easily identify and track the transaction, ensuring accurate recordkeeping and facilitating effective communication regarding the payment status.

The date on the invoice should refer to the day of project completion. If the transaction involves the sale of products, you choose between the order date or the date on which the products were delivered/received.

3. Purchase order reference

Illustration displaying area to enter PO reference on an invoice

Including the purchase order number on the invoice is a reference point for the accounts payable department to match the invoice with the original purchase order and speed up the payment process. 

4. Description of goods/services provided and pricing

Illustration displaying area to enter item line description of goods/services on an invoice

The product descriptions and corresponding prices on the invoice clearly define the delivered goods or services. It is crucial that the information stated in this section precisely matches the product descriptions and pricing specified in the purchase order.

Maintaining consistency and accuracy between the purchase order and the invoice ensures transparency and avoids confusion or discrepancies during the payment process. 

5. Payment terms

Illustration displaying area to enter payment terms on an invoice

It is important to specify the forms of payment you accept, which may include cash, bank transfers, credit cards, PayPal, after-pay services, or even cryptocurrency, depending on your business's preferences.

To ensure timely payment, your invoice should prominently display the due date, indicating the date by which the payment must be made. It is worth noting that in many countries, you have the legal right to charge penalties or late fees if the client fails to make payment on time. 

For larger amounts or extended projects, you may consider agreeing to pay in installments for larger amounts or extended projects. In such cases, it is crucial to include all relevant due dates or milestones in the invoice, clearly outlining the payment schedule to avoid confusion or delays.

While the default due date is often set as 30 days from the invoice date, this timeline can vary based on your company's policies and agreements with clients or buyers.

Common invoice terms 

All these financial terms might make you dizzy, especially if you’re wearing multiple hats as a project manager. Below is our cheat sheet — which you can also download here for easier access. 

Common invoice terms cheat sheet image

Invoice example

While the specifics of an invoice may vary depending on your business and industry, they generally follow a consistent structure. Here's an example of how all the details can come together in an invoice:

Image example of how an invoice should look like
 

Most common types of invoices   

They’re all invoices, but they are definitely not the same. There are several common types of invoices that businesses use based on their specific needs and industry practices. Here are some of the most common types:

Standard invoice

Simple and plain, this is the most basic type of invoice that lists the products or services provided, along with their quantities, prices, and applicable taxes. It shows the total amount due and payment terms. Check out the example above for the details you should include.

Pro forma invoice

A pro forma invoice is a preliminary estimate provided to a client before the goods or services are delivered. It outlines the expected costs, terms, and conditions, providing detailed information such as the scope of the project.

Related: Don’t Risk Your Project: 10 Steps to Handle Last-Minute Scope Changes

Recurring invoice

Recurring invoices are a convenient way to bill clients you provide with subscription fees or ongoing services. These invoices are sent at predetermined intervals, typically monthly or annually.

Think it’s a hassle to generate recurring invoices by hand? Project management invoicing software allows businesses to set up templates and schedules for recurring invoices. This saves time and ensures consistency and accuracy in the invoicing process.

Interim invoice

If you work on large-scale, long-term projects, interim invoices might help your cash flow.  Interim or progress invoices request payment for the portion of the project that has already been completed. Besides, it’s great for the financial management of your project as you showcase the progress of your team’s work.

Additionally, interim invoices serve as a means of mitigating risk for both parties. If any discussions or disputes arise during your project, the payment is not solely dependent on completing all the deliverables. Instead, compensation is tied to the completed milestones or project phases, protecting the company and the client.

Commercial invoice

A commercial or sales invoice is used for international transactions, specifically for customs and taxation purposes. It includes information about the products being shipped, their value, country of origin, and other relevant details required for customs clearance.

Past-due invoices 

Clients who fail to pay an invoice by its due date will receive a past-due invoice as an official reminder of the outstanding payment. The purpose of a past-due invoice is to notify your client of their overdue debt and, in some cases, include additional costs as specified in the payment terms and agreements.

The payment terms typically indicate a specific timeframe for payment, such as net 30, net 60, or net 90. The original invoice is considered past due once these designated dates have passed without receiving payment.

A past-due invoice should not be confused with an outstanding invoice, even though these terms are sometimes used interchangeably. An outstanding invoice refers to an invoice that has yet to be paid but the due date has yet to be reached. 

Time-based invoice

Time-based invoices are commonly used by professionals who charge for their time, such as consultants or freelancers. These invoices detail the hours worked on the clock, the time spent on a project, and the hourly rate or agreed-upon fee.

Credit invoice

Credit invoices, also known as credit memos or credit notes, are issued when a client is entitled to a discount or refund if goods are damaged or to rectify any incorrect information and always show a negative total amount.

Creating a credit invoice might not be fun, but remember, it creates transparency and accountability, resulting in a good understanding with your client.

Debit invoice

Ok, this one is more fun. A debit invoice is issued when the payment amount needs to be increased. Debit invoices are typically used to rectify situations where an initial invoice was issued with an incorrect or insufficient value.

For example, if an invoice was initially generated with an understated amount, a debit invoice will be issued to account for the necessary adjustments and increase the payment owed accordingly. This ensures that the correct and accurate amount is reflected in the updated invoice.

5 invoicing best practices to follow

Illustration of a money deposit

From creating an invoice to sending and maintaining client relationships, the invoicing process is filled with challenges. Here are the five best practices we recommend for streamlining the invoicing of your projects:

1. Keep it simple and clear

Clarity and accuracy help prevent confusion or disputes and make it easier for clients to process your payments. Don’t use vague project descriptions, long line items, or project jargon your client might not be familiar with. Include your contact information, such as an email address or phone number, so that the client can easily reach out to you for any inquiries or clarifications.

Before sending, proofread it thoroughly to ensure there are no errors or typos. Double-check all calculations and verify that the information is accurate. 

Also read: 10 Tips for Writing Effective Project Management Emails

2. Define payment terms and payment options 

By clearly defining payment terms on your invoices, you establish expectations and provide your clients with a clear understanding of when payment is due. Try to send the invoice and payment terms together so the information doesn’t get lost.

Typical payment terms include “Net 30” or "Due on receipt". Defining payment terms helps ensure prompt and timely payment and reduces the risk of payment delays or disputes.

If you don’t have company-wide payment terms, set them up by considering the following:

  • Consider what cash flow works best for your business.
  • Do research if there’s an industry standard.
  • Make sure to avoid getting paid after your bills are due so you don’t go in the red.
  • Align with your client’s expectations to avoid any payment conflict.

Creative companies typically offer a range of payment methods to accommodate the diverse preferences of clients. The most common ones are:

  • Bank transfers: This method is often suitable for larger transactions or clients who prefer traditional banking methods.
  • Credit cards: Setting up a merchant account or using a payment gateway enables clients to make payments using their credit cards. 
  • Online payment gateways: Utilizing online payment gateways such as PayPal, Stripe, or Square allows you to receive payments securely online. These platforms offer various payment options, including credit cards and digital wallets.

3. Customize it according to your brand 

Design professional and branded invoices that align with your business's visual identity and keep it consistent. A well-designed invoice reflects professionalism and enhances your brand image. Use your company logo, colors, and fonts to create a cohesive and visually appealing invoice that leaves a positive impression on clients. 

When your branded and stylized invoice lands in someone’s inbox, they only need to glance over it to spot it’s yours, helping to speed up the payment process.

4. Invoice your client in a timely matter 

When you invoice promptly, you set the expectation for timely payment. Clients are more likely to prioritize and pay invoices that are received straight after the project has been completed. 

Frequent invoicing is also an important part of the project’s administration. The goods listed on invoices, help you track the total amount of products sold within a specific time, creating insights into your stock quantities.

5. Send friendly reminders before the invoice’s due date 

Sometimes large amounts are divided over multiple terms, and a company will need to track when all the installments are due. Or, your client (deliberately) forgot to pay your invoice. It happens! 

Before you send out the past-due invoice, send your contact person a friendly reminder that they have an outstanding payment to fulfill by using our e-mail template:
 

Hi [CUSTOMER NAME],

Hope you are doing well.  We’ve enjoyed working on [PROJECT NAME].

This is just a friendly reminder that payment for your unpaid invoice [INVOICE #] is due on [PAYMENT DUE DATE].  I’ve attached the invoice for your reference.

Please feel free to contact me if you have any questions about the invoice.

 

Kind regards,

[YOUR NAME]


Manually tracking if your invoices are paid on time can be quite time-consuming. Consider using project management invoicing software to keep up with your project finances. 

Simplify your project invoicing process 

Rodeo Drive is a user-friendly project management and invoicing tool that helps you stay organized and work more efficiently so you can take on additional clients, benefiting your business and profitability.

The platform combines intuitive design with a range of powerful features, making it an exceptional choice for freelancers seeking an efficient invoicing solution. 

Invoicing made easy

Creating an invoice in Rodeo Drive

There’s no more need to create invoices from scratch. Rodeo Drive uses the data from your logged hours to generate invoices, which means you don’t have to calculate the time spent on projects by hand. 

Example invoice in Rodeo Drive

You can even split and send invoices in phases, which is beneficial for your cash flow, or bill according to the work your team has already completed. 

Our integration with QuickBooks (US) and Xero (UK) helps you with bookkeeping and billing.

Effortless time-tracking

The time tracking module in Rodeo Drive helps your team to track the hours they’ve worked for clients accurately. Rodeo Drive automatically updates the project budget according to the time you’ve logged. 

Rodeo Drive's live timer

Bonus: visibility in the hours worked can be helpful as a reference for similar projects in the future. 

Budget like a pro

Building a strong foundation for a profitable project begins with a well-defined budget. Rodeo Drive's budget feature empowers you to create budgets from scratch based on your project phases. 

Building a budget in Rodeo Drive

Simply input the hours, hourly rate, and necessary resources, and within minutes, you'll have a comprehensive estimate to send to your clients.

With Rodeo Drive's budgeting module, you can easily break down your project into distinct phases and allocate separate budgets to each. 

Additional features

  • Contact management: Keep all your client and vendor information in one place.
  • Planning and Scheduling: Planning and assigning tasks in Rodeo Drive is a seamless process as the platform displays each employee's skills and current availability before you assign them to a task.
  • Expenses & Purchase Orders: Track project expenses efficiently with your own POs.
  • Multilanguage: You can easily switch languages in Rodeo Drive by selecting Dutch, English, or German under ‘Preferred language.’
  • The insights you need:  Rodeo Drive’s features are interconnected. This means we’re able to bring you in-depth insights into your team’s usage of the platform and the project’s profitability. 

If you’re looking for a software solution to keep your invoices organized, Rodeo Drive can help. Try for free today.

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Originally published on June 29, 2021. Updated on June 5, 2023