What is an Invoice? Types & Purposes of Invoices

If you're new to freelancing or you've just started a small business, invoicing can be pretty confusing.

You've put in all the hard work and now you want to get paid, but how? In this article, we'll answer the question "What is an invoice?" and provide you with the know-how you need to create and send an invoice to clients.

Let's jump right in.

What is an Invoice

According to the Cambridge English Dictionary, an invoice is:

"A document that lists things provided or work done, gives their cost, and asks for payment."

That sums it up pretty well! Invoices specify what the buyer must pay once the seller has provided the service according to specific payment terms. Invoices are an integral part of doing business, for buyers and sellers.

A sales invoice refers to an invoice for the sale of goods or services from a seller's point of view. On the other hand, a purchase invoice indicates an invoice for the cost of products or services rendered. Whichever kind of invoice, they detail the services rendered or provided, the total amount due, and the terms of payment.

In the past invoices were sent in letter-form via the post or fax machine. As we moved further into the digital world, they were sent as file attachments in emails. This is still common today, however more and more professionals are turning to powerful cloud-based invoicing software like Bonsai to streamline the process of creating, sending, and tracking invoices.

Distinction Between an Invoice, Bill, and Receipt

Often, the word invoice is used interchangeably with "bill" or even “receipt”. But they don't mean quite the same thing.

Invoices and bills are documents that technically convey the same information. They both depict the amount owed for the sale of products or services. However, an invoice is typically sent by freelancers or businesses seeking to collect payment from clients. Instead, a customer uses bills to keep track of payments owed to suppliers. Essentially, they're the same thing but used by different parties involved in the business transaction.

A receipt, on the other hand, acknowledges proof of a transaction between a seller and a buyer. In other words, it confirms that the products or services have already been paid for. An invoice or bill can be used to request payment, but then a receipt is sent once the payment has been received.

If you're a freelancer, you might be interested in reading about how to bill a client.

Key Components of an Invoice

As a business owner, contractor, or freelancer, you have the important task of creating professional invoices to bill your clients. But designing invoices for customers may seem complicated, especially if you haven’t done it before.

Fortunately, Bonsai’s ready-to-use invoice templates have all the key components you need to create invoices in minutes. That way, you never miss a detail!

Our free invoice template include fields for:

• invoice number
• invoice summary
• your name
• your business name
• your business contact details (phone number, email address, address, and/or social media links)
• client name
• client’s company name (if applicable)
• client contact information
• project details
• product details
• line item costs
• total costs
• final balance
• payment instructions
• payment deadline / due date
• billing details
• accepted payment methods (e.g. credit cards, PayPal, cash, checks, etc.)
• your bank account details (if needed)
• late fees or overdue payment terms
• next steps
• “Thank you” message

Get started with our free invoice templates for hassle-free invoicing!

Types of Invoices

With the Bonsai invoice templates, you aren’t limited to paper invoices. In fact, we provide a wide range of invoice types and formats for you to choose from. So, you can send invoices in the format that works best for you and your customers.

Email Invoices

Perhaps the most common type of invoice is an email invoice. This is simply when you send a client an invoice via email. An invoice email template can make it easy to customize your invoice, add the relevant details, tally the total, download the document as a PDF, and send it to your client over email. Or, you can create an invoice in Google Docs and send your client a link directly to the invoice.

Hand-Written Invoices

Hand-written invoices are relatively old school, but they are still the chosen method for many businesses. For instance, if you are a local contractor or construction business owner, you might draft hand-written invoices while you are scoping out the job. You’re not dependent on having a computer nearby to create an invoice on the spot.

Electronic Invoices

Electronic invoices require the use of electronic tools, like Point of Sale (POS) software to create invoices. This method is popular with restaurants and local retailers, as customers want to pay on the spot (typically, with their credit card).

Online Invoices

Online invoices are quickly becoming the method of choice for online businesses and service providers. This is because it is easy to create, send, and store all of your invoices directly in the cloud. No need to shuffle through file folders or fuss with complicated electronic tools.

There are a few online invoice templates you can use in your business, depending on your preference:

• Excel Invoice Template
• Microsoft Word Invoice Template
• Google Docs Invoice Template
• PDF Invoice Template

You can also speed up your invoicing and streamline the process with cloud-based invoicing tools. These allow you to track payment status, send automated reminders, accept a wide range of payment methods, and review your business financials online.

Mobile Invoices

Mobile invoices are simply online invoices that are available on mobile devices, such as a smartphone or tablet. For example, if you send a client an invoice via Google Docs, they can open the invoice using the Google Docs app on their phone. Similarly, if you use an online tool like Bonsai, clients will be able to open these invoices on their mobile device.

Industry-Specific Invoices

There are also industry-specific invoices, which can be available as hand-written templates, online documents, or email invoices. The following invoice templates are available in a variety of formats, including Google Docs, Microsoft Word, Excel, PDF, and others:

• Freelance Invoice Template
• Consulting Invoice Template
• Photography Invoice Template
• Graphic Design Invoice Template
• Construction Invoice Template
• Contractor Invoice Template
• Rental Invoice Template
• Pro Forma Invoice Template
• Itemized Bill Template
• Printable Invoice Template
• Professional Invoice Templates

Common Types of Invoices

Besides the various formats (email, PDF, etc.) available, there are several types of invoices as well. These vary depending on their purpose, such as invoicing clients on a recurring basis or collecting an upfront deposit.

Before creating an invoice, consider the requirements for your project, the preferring billing schedule, and your accepted payment methods. Always discuss these details with your customers upfront to set clear expectations.

Pro Forma Invoice

A pro forma invoice is essentially a preliminary bill that’s sent to a buyer before the actual completion of goods or services. It outlines the products/services to be provided, the estimated costs, and the terms of the transaction.

Interim Invoice

This type of invoice is used to bill for partial or interim work completed during the course of a project. It is one form of progressive billing.

Recurring Invoice

A recurring invoice is used to invoice clients at regular intervals for ongoing services. They can also be used for subscription-based services or products.

Credit Invoice

A credit invoice might be issued by a seller to nullify a previously issued invoice. This is usually due to refunds, returns, or adjustments related to the original invoice.

Debit Invoice

A debit invoice is sent to request further payment from a customer, often due to added costs, supplementary items, or corrections.

Past Due Invoice

This refers to an invoice that remains unpaid past its due date. If you are still waiting on payment from a client or customer, this is a good time to send a friendly reminder.

Commercial Invoice

A commercial invoice is a document used in international trade. It itemizes and describes the goods shipped, their value, and other essential information for customs and payment purposes.

Why Businesses Use Invoices

By now it might be obvious how significant of a role invoices play in the financial management of your business. They are essential for collecting payment, organizing your business financials, and setting clear expectations with clients.

But there are many more benefits to using invoices. Here are just a few of the many reasons why businesses use invoices.

Legal Protection

Invoices play a crucial role in providing legal protection for your business. They serve as formal documentation of the agreed-upon terms, prices, and services between you and the customer. In the event of disputes or discrepancies, invoices act as evidence, safeguarding you from potential legal issues. Detailed invoices with clear terms help in clarifying payment processes, credit or debit transactions, fees, costs, and any discounts or sales applied.

Payment Tracking

Businesses can also use invoices to track payments efficiently. Each invoice carries a unique identifier, allowing easy monitoring of outstanding amounts, payment due dates, and received payments. This tracking aids in maintaining a healthy cash flow by identifying overdue payments, enabling timely follow-ups, and ensuring a balance between incoming and outgoing payments. With proper accounting software, you can streamline your payment tracking process, keeping accounts up-to-date and reducing the risk of errors!

Record Maintenance

Invoices serve as essential records for your business, documenting all financial transactions and serving as part of your accounting records.

These records include details such as amounts, prices, taxes, fees, and sums involved in sales or services rendered. Maintaining well-organized invoices aids in effective bookkeeping, enabling you to accurately track your financial activities. This systematic record-keeping facilitates transparency and provides a clear audit trail for accountants and regulatory authorities.

Easy Tax Filing

Invoices are integral when it comes to filing taxes. They contain vital information about taxable income, tax rates, and any applicable tax charges – all information you’ll need when it’s time to file! Properly documented invoices help in calculating accurate tax amounts owed to governmental authorities. Through clear and detailed invoices, it’s easier to justify your claimed deductions, expenses, and taxable amounts.

Business Analytics

Previous invoices can provide insight into your business’s success as a whole. By examining patterns in pricing, sales volumes, discounts, and transaction amounts, you can derive meaningful business analytics! This data can help you make informed decisions about pricing, identifying profitable sales channels, and evaluating costs and profitability.

When and How to Send Invoices

So, you’ve created an invoice and it’s time to get paid? Now what? Well, glad you asked! There are several convenient methods available to you to make sending invoices easy.

Consider these best practices when sending invoices for your products or projects.

Timing: Advance, Milestone, On Delivery, Recurring

First, determine the timing for sending your invoice (or several invoices). Do you want to get paid in advance of the project start date? Will you invoice the client based on certain milestones? Consider the right timing for you and your client.

Advance Invoicing: This involves sending an invoice for goods or services before delivery, typically requiring a partial or full payment upfront to secure the order or service.

Milestone Invoicing: This is for when you want to invoice clients based on predetermined project milestones. Payments may be tied to specific achievements or stages of completion.

On Delivery Invoicing: This invoicing happens immediately upon delivering the goods or completing the service. Payment is due upon receipt or within a specified timeframe after delivery.

Recurring Invoicing: Here, invoices are generated at regular intervals for ongoing services or subscriptions. You’ll likely follow a predetermined schedule, such as monthly, quarterly, or annual invoicing cycles.

E-Invoicing and Digital Methods

Once you’ve determined the timing of your invoice(s), it’s time to pick the delivery method. You have two primary options:

E-Invoicing: i.e. electronic invoicing, where you use electronic tools (like a card reader or POS system) to invoice a customer in-person. Customers can pay on the spot, typically via cash or credit card.

Digital Methods: These include any online or cloud-based invoicing solutions, such as emailing a PDF invoice, sending a link to a Google Doc invoice, or sending an invoice via online invoicing software. With these methods, you are typically able to accept credit cards, debit cards, PayPal, ACH transfers, and more, depending on your preferences.

Best Practices and Modern Invoicing Techniques

You don’t have to be an accountant to create invoices like a pro! In fact, with the right tools and processes in place, designing your own invoices will be a breeze.

Fortunately, modern tools like Bonsai’s invoicing software makes it easy to design, customize, send, and monitor your invoices. Now you can oversee your business accounting, invoicing, and bookkeeping, all in one place.

Be sure to follow these best practices when creating invoice statements for your business:

1. Ensure that the invoice is issued by a seller and sent to a buyer promptly after goods or services are delivered or completed.
2. Clearly specify the details of the goods or services provided, including descriptions, quantities, prices, and any applicable taxes, ensuring transparency.
3. Specify clear payment terms outlining the agreed-upon conditions for payment, such as payment deadlines and accepted payment methods.
4. Assign a unique identifier to each invoice for easy tracking and reference in both parties' records.
5. Include comprehensive tax details to meet regulatory requirements and provide clarity on tax charges, if applicable.
6. Mention a specific due date by which the payment is expected, facilitating prompt payment and avoiding delays.
7. Clearly state that the invoice requires payment, reinforcing the obligation for the buyer to settle the amount owed.
8. Offer flexibility in invoice format, allowing for electronic or paper-based invoicing based on the buyer's preferences or established communication channels.
9. Be prepared for potential disputes by maintaining detailed records and providing accessible channels for dispute resolution if discrepancies arise during payment reconciliation.
10. Save completed invoices as receipts of products or services delivered so you have these documents available for effective business accounting and tax reporting.
11. If any revisions are needed on the invoice, save the original invoice, make a copy, and then update the details accordingly. Save all drafts of invoices for your records.

Tips for Effective Invoicing

At Bonsai, we’re all about helping companies, small businesses, and organizations of all industries streamline their invoicing processes. Whether you need to create simple invoice agreements, automate recurring invoices, or correct mistakes on previous invoices, we’ve got you covered.

Here are a few tips to get you started:

Clear Product Descriptions

Capture your customers' attention with crystal-clear product descriptions on your invoices. Detailed and understandable descriptions not only prevent confusion but also showcase the value clients are receiving, fostering trust and encouraging prompt payment.

Differentiate Purchase Orders and Invoices

Understanding the difference between purchase orders and invoices is key to streamlining your business operations. Use purchase orders to initiate transactions and invoices to request payment. When in doubt, discuss various invoices methods with your client to determine what works best for both parties.

Offer Online Payment Options

Boost convenience and promptness in payments by offering diverse online payment options, such as PayPal, Venmo, Stripe, or bank transfer, on your invoices. It’s time to embrace the digital age and make it easy for customers to settle payments swiftly and securely.

Review the Final Details

With invoicing, the small details make all the difference. Before you finalize and verify your invoice, give it another once-over to make sure everything is clear and accurate. This will save you time compared to having to make edits later, and will help ensure your customer pays you correctly.

Don’t forget to include these commonly overlooked fields:

• date of issue
• due date
• invoice or reference number
• seller's details (telephone number, email address, etc.)
• buyer's details
• list of products/services
• unit price
• quantity
• currency
• discounts or adjustments
• subtotal
• grand total
• notes or special instructions
• payment status
• invoice format
• digital signature (if electronic)

We also recommend saving copies of your invoices for your records. If clients have any questions about past invoices, these documents will be readily available for you to review.

Advantages of Using Invoicing Software

Free invoice templates are great, but they can become a hassle once you start managing multiple clients and transactions. Why not streamline the process with automation?

Bonsai invoicing software is your go-to tool for simplifying your invoicing process and taking your business to the next level! With Bonsai, you can say goodbye to invoice headaches and get paid faster. Our built-in templates have all the features and elements you need for accurate, professional invoicing.

Plus, with secure online payment options, getting paid becomes a breeze. Stay organized, get paid faster, and focus on what you do best – growing your business – with Bonsai.

Benefits of Bonsai's Invoicing Software

By integrating freelance business processes from creating proposals to managing your accounts, Bonsai is an invaluable tool for freelancers looking to streamline their back-office operations in a unified platform.

Using invoicing software like Bonsai to create professional invoices has many advantages. Bonsai's free invoice generator is a life-saver for freelance professionals who don't know where to start. Users can choose from numerous invoice templates geared towards all various services. Using invoice templates has several benefits, including:

• You can save essential information to use again later when invoicing the same client or buyer.
• Saves time as you won't have to create the invoice from scratch.
• Establishes invoicing consistency and reduces errors that could stop you from being paid.
• Keeps track of whether invoices have been viewed, open, or paid with a handy dashboard.
  

Bonsai's easy to use invoicing tool takes the hassle out of invoicing. Create invoices in minutes, highlight payment terms, and ensure you're always paid on time.

Did you know that there's more to Bonsai that invoicing?

Bonsai provides freelancers with everything they need to successfully run their business. Bonsai's freelance product suite allows users to create proposals, contracts, and freelance invoices templates and integrates with essential tools to track and manage your pipeline, projects, and payments.

Whether you're a freelance writer, photographer, software developer, or another business professional—Bonsai's smart automation takes the stress out of business management. So you can spend less time on tedious business management tasks, and focus on doing what you do best.

Get Started With Bonsai Today

Before you can start creating and sending invoices, you'll need to secure your clients. That means creating a professional, legally binding contract.

Bonsai offers robust contact creation functionality with countless contract templates for freelancers. Once you've described the scope of your work, added payment details, and signed the contract; you can integrate your invoices to receive faster payments and better business security.

Getting started with Bonsai is simple. Just sign up with your name and email address to access and create professional-looking contracts that'll help you land and keep clients.