What is an Invoice? Definition and Meaning

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Reading Time: 4 minutes

According to Webster’s dictionary

An invoice is an itemized bill for goods sold or services provided, containing individual prices, the total charge, and the terms.

In simple terms, an invoice, is an authorized document that a seller issues for the products and services rendered to the buyer. So whenever your customer owes your business money, you need to send an invoice to receive payment. An invoice is often considered a professional way of asking for money. It often acts as a reminder to the customer that money is due and payment has to be made within a stipulated period of time.

An invoice is an integral part of sales transaction and is generated after the customer has confirmed to purchase goods at the agreed prices. Unless you send an invoice, the customer is unlikely to pay you for your services.

From the customers’ perspective, invoices allow them to know what purchases have been made for the money they have spent. Customers commonly maintain invoices to keep a track of their expenditure. Small and large business organizations keep copies of invoices, which gives an accurate picture of their financial affairs. 

Things to Include in an Invoice

Your invoice should contain the right information so that customers understand and get a correct overview of the transaction. You need to include the following things in an invoice:

    • It goes without saying that the invoice will show total charges incurred by the customer for receiving products and services from the seller.
    • It will also contain the name of the seller along with his trading address, which is the registered address of the company.
    • The seller will also include ‘Bill To’ information that show the details of the customer for whom the invoice is being generated. Contact names of people for direct correspondence with both the parties are also mentioned in the document.
    • Apart from total invoice, the price of each item along with its quantity and description will also be listed. This itemized price breakdown must be presented so that the customer knows the per unit cost of all the purchased products.
    • The document will also contain the payment terms and conditions that suggests the time frame in which a buyer must pay to the seller. The payment due date is often mentioned in this form; ‘Net D’. For example Net 15 days indicates that the total amount must be paid within 15 days.
    • Payment terms will also include payment methods such as cash, credit card, debit card, company check etc.
    • A unique reference number, also referred to as invoice number is assigned sequentially to every invoice. These invoice numbers have to be unique and sequential which help to keep track of invoices.
    • Seller generating invoices also include information about late payment fees, meaning the buyer will be charged if the bill is not paid after the payment due date. Mentioning late fee details is one of the best ways to receive payment faster. 

    Online Invoicing

    Cloud-based accounting software applications are now commonly used to manage the invoicing process. With these software tools, you can quickly create, send and track invoices online as well as know when an invoice has been paid. These software tools help to automate billing and payment collection process and enable you to identify transactions involving earned and deferred revenue.

    Sellers can even set automatic email reminders, which will be sent to customers whenever invoices pass their due date. Accounting software also allows to customize invoice by adding company logo, brand color and personalized messages.

    What is Invoice Financing?

    Also referred to as invoice discounting, it is form of business funding in which the company (seller) borrows money equal to the amount that is remaining from unpaid invoices. So when the seller is facing cash crunch he may choose invoice financing to fund his business. The money is lent for short-term only against outstanding invoices. This means as soon as the customers pay up their bills, the seller should return the amount borrowed along with interest.

    What is a Tax Invoice?

    A tax invoice is a legal document that provides details about products that are taxed. Prepared by the seller, the document provides a list of both taxable and non-taxable items. The document clearly shows the amount of tax charged for every product that is taxable.

    Can Invoicing Process Affect your Cash Flow

    Since most business organizations heavily depend on invoice to receive payment from customers, it is imperative to follow effective invoicing techniques to ensure healthy cash flow. However, issues in invoicing can have a negative impact on cash flow, leading to serious financial problems. For instance, not sending the invoice in a timely manner can delay payment and hinder your cash flow.

    Many times, invoicing mistakes such as incorrect information can frustrate customer to no end, leading to payment refusal. Keeping this in mind, make sure the invoices are accurate, so that your organization does not suffer from slow payments. It should also provide information about late penalties, which will discourage customers from paying late. Moreover, your invoice should allow easy payment options like PayPal, which can also help to improve cash flow.

    Difference Between Invoice and Purchase Order

    Difference Between Invoice and Purchase Order

    Purchase orders (POs) are created before the product is delivered to the buyer, while an invoice is generated after the transaction or product delivery. Also POs are issued by the buyer to the seller for ordering goods. On the other hand, invoices are generated by the seller for notifying the amount of business money owed by the buyer. Unlike PO, the buyer is expected to make payment within a stipulated period of time after receiving an invoice. Also, while creation of PO signals the approval of sale, an invoice is used to define the terms and conditions of sale.

    Also, there is a major difference between a Sales quotation and an invoice. A quote only gives an estimated cost, which is negotiable. On the other hand, an invoice provides the actual cost of products and services. Nowadays many organizations are using a Sales management software to efficiently manage quotes, purchase orders and invoices.

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