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Importance of invoices: definition, purposes, elements

9
minute read
Updated on:
June 20, 2023
June 20, 2023
Table of contents

Key Takeaways:

  • Invoicing is important for your business for bookkeeping, tax records, legal protection, business analysis, and inventory tracking.
  • Key elements in an invoice include a unique number, company/customer details, product/service description, total amount, date, and payment terms.
  • Invoices can be sent in advance, at milestones, on delivery, or on a recurring basis, depending on the business model.
  • Invoice-generating tools, like HelloBonsai, can automate and streamline the invoicing process, helping you focus on scaling your business.

Crafting an invoice can be tricky, especially if it's you do it by yourself as a small business owner. Because no matter how good of a service or product you provide your customer, if the overall working experience is hasty and unprofessional, it can ruin your company's image.

But once you understand the key points, such as what is an invoice in business and what is the purpose of an invoice, you will be able to get paid faster.

So, we’ve put together everything you need to know about invoicing for your business. Here’s what you’ll learn:

  • What is an invoice in business?
  • What is the purpose of an invoice?
  • What does an invoice include?
  • When should you send an invoice?
  • How to create an invoice effortlessly?

What is an invoice in business?

An invoice in business is a document given to the customer by the service provider or seller that states the cost of products or services, the due date for the payment, and any other payment details.

What is the purpose of an invoice?

Wondering how an invoice can affect your business? Here’s why you should invoice your clients systematically:

  1. Helps with bookkeeping

Invoices comprise essential data for maintaining accurate bookkeeping records by documenting the business's financial history. They contain information about when and how of the products, services, or projects. This also includes the amount of money made, which can be used for tallying sales and expenses, calculating key metrics such as net profit and margin, and asset turnover ratio.

  1. Hassle-free tax records

The invoice data can help you confirm the data you enlist on your tax filings. Moreover, the IRS (Internal Revenue System) recommends that small businesses retain records summarizing their business transactions, including invoices.

  1. Provides legal protection

An invoice with all the required details, signed by both parties, can serve as a legally binding agreement as a reliable record of the transaction that establishes the seller's right to payment. In addition, it can be used as a protection against false lawsuits.

  1. Assists in business analysis and building marketing strategies

Records of the invoices comprise key information like prices of goods or services, total amount and date of transaction, and so on. These details help analyze the peak buying period, most popular and least popular services or goods, and other trends in your business. The analysis can help tailor intelligent marketing strategies.

  1. Helps track inventory

If your business includes keeping an inventory, then invoices can act as one of the tools that can help track inventory and let you know when and how much restocking is needed in the future based on past sales.

Also: Note that an invoice is not the same as a receipt. It’s a receipt that can track the exact sale of goods or services based on the confirmed orders.

What does an invoice include?

If you know what is an invoice in business, then drafting an invoice isn't a daunting task if you know exactly what to include. Following are 11 elements you should include in your invoice.

  • Label – “invoice”

Label the document with the word 'invoice' near the top of the sheet in a plain, chief font. This will differentiate the invoice from other documents and random papers.

  • Invoice number

Every invoice should be assigned a unique identifier/ invoice number without any replicas of the set of digits. A unique identifier provides clear identification and easy record-keeping.

It should also include a PO number to make the tracking of sales easier.

  • "From" name and address

Clearly and precisely include your company's details, such as the name, address, and contact details. In addition, including your company's logo helps the customer identify your company and makes your invoice stand out.

  • "To" name and address

Include the customer's name, address (a physical address or an email address), and contact details. Including this detail is the standard practice of drafting an invoice, which can help you chase the late payments with the person who can push them through.

  • Description of services or products

Enlist an accurate and clear description of the services or goods that are being invoiced. Include the name or title of goods and services provided in a separate line, their prices, and the amount or quantity of product or service.

  • Total amount charged

Once the goods and services, including their respective prices, add the total amount due in the transaction on your invoice. This will serve as a reference point for your customer.

  • Date of supply/date of service

The date of supply is when the product is made available to the customer. It is the date when the goods are assembled or installed.

  • Invoice date

Including a date when the invoice was generated and provided to the customer makes it clear to the customer when the deadline for payment is.

  • Payment terms and methods

A payment term in the invoice is an agreement that sets your expectations for payment, outlining the how, when, and by what method your customers will provide payment. Some of the standard payment terms are PIA (Payment in advance), COD (Cash on delivery), CIA (Cash in advance), and more. And a payment method you are comfortable with, such as cash, checks, credit or debit cards, money orders, pay orders, bank transfers, or online payment services.

  • Purchase order number

A purchase order number is a unique number assigned to a purchase order form, and similar to the invoice number, they are also useful for administrative purposes in a business organization.

  • Thank you/personalized note

Any simple gratitude note or personalized messages add a more personal touch to your business and make your customers feel appreciated.

Creating an invoice from scratch can be time-consuming and challenging, so using an invoice generator to create invoicing templates can be a savior.

When should you send an invoice?

Besides knowing the purpose of an invoice, it is also crucial to know when to send one. Here are the different standard practices that many businesses follow.

  • Advance invoicing

An advance invoicing is when you request partial or complete payment from a customer before goods or services are delivered. This confirms the customer's commitment and avoids the possible loss to your business if the customer suddenly cancels the project.

  • Invoicing each milestone

Milestone invoicing is when the total amount of a project or service is distributed to be invoiced across various billing periods, triggered by a predefined checkpoint that indicates progress is being made.

  • Invoicing on delivery

Invoicing on delivery is when you send invoices to the customers after the goods have been delivered or the services have been rendered, according to the agreement. This is the most common invoicing practice that requires the sellers to notify customers that the work is done from their end and verify all the necessary details before proceeding with the professional invoice.

  • Recurring invoices

Recurring invoices are when the goods or services are delivered consistently to a customer, and the invoices are sent at fixed intervals according to the agreement. Usually, the interval period is weekly or monthly, depending on how often the customer orders.

How to create an invoice effortlessly?

If your work requires you to draft a lot of invoices, then it is time to try an invoice-generating tool. HelloBonsai’s invoicing tool can help you create well-formatted invoices within seconds.

It can help you sign retainers & send them invoices automatically + enable automated tax tracking, which most freelancers struggle with.

What's more, HelloBonsai can also help generate proposals and contracts and track and manage time, projects, expenses, and more.

So, sign more clients and get paid faster & more professionally.

Conclusion

We hope you’ve understood what is the purpose of an invoice and how does it affect your business. Remember that an invoice comprises many delicate details you shouldn't miss out on to get paid fairly for your hard work. Any possible invoicing mistake can ruin your efforts to craft the best possible image for your business.

An alternative way to overcome the hurdle of drafting the invoices repeatedly is to take aid from the Bonsai invoicing tool. Our tool's amazing features can make your business and life much easier! So, sign up to Bonsai for a FREE 7-day trial and see your business scaling up.

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