How to Write an Invoice

These days, the internet makes it easier than ever to operate a small business. Whether you’re selling handmade goods or providing professional services, online platforms give you new ways to connect with customers. 

One thing hasn’t changed for small business owners, though. Prompt and complete payments from your customers can make or break your business. If you don’t have an organized system for billing, you may have issues with cash flow. Worse yet, you could find yourself spending precious time tracking down late payments. On the other hand, presenting clients with a professional billing system and clear billing terms should enable you to resolve disputes and secure timely payment.

For both online and brick-and-mortar businesses, invoicing is an important way to communicate with clients and customers. An invoice provides the recipient with information about how much money they owe, the due date, and the payment terms. Moreover, an invoice contains vital information that will help you and your customers keep detailed records. This can become important when tax time comes around, and it’s also useful in the event that a dispute arises. 

As an example, a client might approach you after many months, claiming that they already paid for certain services. With an invoice number, it’s easier to track down a canceled check or a receipt to see whether the payment went through. This can be particularly useful when you have multiple charges for the same dollar amount, as in the case of a monthly retainer for services. An invoice number makes it far easier to stay organized and distinguish one payment from the next.

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What Is the Difference Between a Bill and an Invoice?

“Invoice” is another word for a payment request. Unlike a bill, which usually requires immediate payment, an invoice often has customized payment terms. As an example, an invoice might specify “net 30,” indicating that the seller or service provider requires payment 30 days after the invoice date. Now, you may be wondering why any small business would allow time to pass before payment. Why not just ask for the payment upfront? As it happens, you can deliver an invoice for services not yet rendered. 

The delayed payment option developed out of necessity. Since many businesses require some processing of a bill before payment, they need to understand what qualifies as an acceptable delay. The seller or service provider can also set penalties or incentives to encourage prompt payment. 

An invoice is also distinct from a purchase order, receipt, or order confirmation. A purchase order (PO) is typically prepared by a buyer, rather than the seller. Often, the PO gets completed before the invoice, and many invoices include the PO number for reference. An order confirmation comes next in the sequence. The seller often provides documentation to show the buyer that the order has been processed. This confirmation is not used for accounting purposes, and is often subject to change. After the receipt of the invoice and a completion of payment, the seller provides the buyer with a receipt. Typically, a receipt might include a PO number, and invoice number, and an order confirmation number (if applicable). 

What Information Must Be Included on an Invoice?

Every invoice should contain the following information:

  • The word “invoice” and a unique invoice number should be written clearly at the top of the invoice. 
  • Include your business name and contact information. Be sure to list a phone number, in case your client has any questions about the invoice. 
  • Specify the invoice date and the payment due date. Some invoices request “payment upon receipt.”
  • The customer’s name and an up-to-date business address should be included. 
  • Outline the services provided, the unit rate, and quantity. If you’ve provided multiple products or services, be sure to break each unique charge into a separate line item. For example, if you charge $20/hr for one service and $12/hour for another, be sure to list the total hours spent on each activity within separate lines. 
  • Clearly label the total amount due. 
  • Describe your payment terms, including the forms of payment accepted (credit card, Paypal, bank transfer, etc.), return policies, and any penalties for late payment.  

What Information Is Optional in an Invoice?

To make your invoice as professional as possible, consider adding these elements:

  • Place your business logo at the top of the invoice, next to your business name and address. 
  • While you have your customer’s attention, include any relevant marketing and promotions. 
  • Add together subtotals for each category within your invoice to make it easier to read. 
  • If you’re creating an online invoice, it’s helpful to label the file with the invoice number. For better organization, use the same naming convention for all of your files. For the client Dog Snacks, you might label the invoices DS_Invoice1501.pdf, DS_Invoice1502.pdf, DS_Invoice1503.pdf, etc.  
  • If you offer a satisfaction guarantee, be sure to include the details of your policy on the invoice. 
  • For some payment methods, you may need to include instructions for how to complete a transaction. 
  • Many businesses add a personal note on an invoice, provided that there is sufficient space to do so. 
  • Be sure to include the sales tax or shipping costs. 

Invoice Layouts

You have quite a bit of freedom when formatting your invoice. We recommend limiting your invoice to one page. Since this document tracks essential information for bookkeeping, you don’t want pages getting lost or misplaced. 

There are a number of free invoice templates available online. For example, QuickBooks offers this downloadable template, which can be completed using form fields. FreshBooks provides free blank templates for Microsoft Word, Adobe PDF, Google Sheets, and Microsoft Excel. Invoice Simple allows you to create a free invoice design using customized colors.

Whatever layout you choose, remember that the main goal of the invoice is to communicate a payment request. A complicated design could be confusing, and it may result in delayed payments or disputes. A professional invoice should be straightforward, and it should have easy-to-understand line items. 

Tips for Getting Paid

Freelancers and self-employed people don’t have time to chase down a payment that’s past due. Every moment you spend negotiating payment options or sending reminder emails is a moment that you’re not providing products and services to your other clients. While you can’t bill for the hours that you spend tracking down a client, you can charge for late payments in the form of penalties. Better still, you can incentivize your clients to pay early by offering promotions. 

2% net 10 | Many sellers offer buyers the option to save money by paying early. The phrase “2% net 10” means that the recipient has the option to save 2% on the total amount due, as long as they pay in full within 10 days of the invoice date. Rather than threatening clients with late fees, this tactic gives them a financial incentive to move your invoice to the top of the pile. 

Late payment penalty | In the U.S., each state has unique guidelines about how much you can charge for a late payment penalty. To calculate how much you can charge, take the state’s maximum annual interest rate and multiply it by the number of days the payment is late divided by 365. 

So, if the maximum annual interest rate is 15% and the client delivers the payment 35 days past the due date, you take 35/365 and multiply it by 0.15. Next, multiply that number by the total amount due. 

Of course, you can always charge less than the maximum penalty. If you decide to charge your customers for late payments, be sure to explain how your fees work before you enter into a contract with them. No one likes surprise fees, and introducing unexpected penalties may cause their payment to be delayed further. 

In general, try to be very clear about how your payment terms work. Whenever possible, discuss your terms with clients, and sign a contract before you begin work. Not only do clear agreements benefit your client relationships, but they can also save you money in the long run. Chargebacks and credit disputes cost businesses money, often more than the initial disputed amount. Payment processors frequently charge extra fees when they have to investigate disagreements. Plus, having a high chargeback rate (above 1%) may cause lenders to view your business as a risky investment. 

How Should You Send an Invoice?

There are three main channels for sending invoices to clients: mail, email, and third party services. Printed invoices help provide a paper trail for bookkeeping; however, they do not always make online payment processing easy. On the other hand, a digital invoice can include links to make instant payment simpler. Invoice software can streamline the process, providing a single platform to create and send invoices, with the option to input bank account information for faster payment processing. 

Unfortunately, some accounting softwares charge hefty subscription fees. Convenience comes at a cost, and the low end plans begin around $6-13 per month. Some plans limit the number of invoices you can submit each month. 

Thankfully, with your newfound knowledge of invoicing, you should be able to submit and track invoices without online invoicing software if you choose. Just be sure to address your invoice to the right person, especially when you’re billing a large organization. For email invoicing, we also recommend writing a subject line that specifies the name of your company and the invoice number. 

Before you send your invoice, double-check that the invoice number is unique and that the amounts billed are accurate. A mistake on an invoice can be much more serious than a typo on a letter. Your customer may assume that any mistake indicates fraudulent charges, rather than an innocent error. 

Be extremely careful with your invoices. While unprofessional invoices could cost you money and clients, professional invoices can help your small business flourish. A good invoice encourages prompt and reliable payments, and it builds trust with your customers. 

Sources:

  1. https://taluspay.com/blog/9-ways-to-avoid-chargebacks-and-credit-disputes/
  2. https://www.hiveage.com/blog/how-to-write-an-invoice/
  3. https://www.freshbooks.com/blog/late-payment-fees
  4. https://quickbooks.intuit.com/payments/get-paid-on-invoices/generator/
  5. https://www.freshbooks.com/invoice-templates
  6. https://www.invoicesimple.com/invoice-generator?utm_source=website&utm_medium=organic&utm_content=hero_nav