What is an invoice and how does invoicing work?
Last editedMay 202312 min read
What is an invoice and what should you include in one?
What is an invoice?
An invoice is a payment demand issued by a seller to the buyer of goods or services after the sale, detailing what goods have been provided or work completed and how much must be paid in return.
What is an invoice used for?
Invoices can be used to bill for one-off projects or for recurring work, but they are most widely used to request payment after work is completed and where there is an ongoing relationship with the customer. Traditionally, invoices came in paper form, either handwritten or typed, and then sent by post.
In recent years, many businesses have used email to speed up delivery. But the most tech-savvy firms now employ specialist software to generate e-invoices immediately, with information flowing automatically between seller and buyer.
Invoices, bills and purchase orders
Before we look at invoice basics it's useful to clarify terminology and clear up any questions regarding whether invoices, bills and purchase orders serve the same purpose or have different uses.
Invoices vs bills
A bill is often considered to be interchangeable with an invoice. Different parties may choose to differentiate bills from invoices in several ways. Common differentiations include:
Bill is a preferred term based on industry - Accountants and lawyers commonly use the term "billable hours" to refer to the time spent on work for a client that they can be charged for. Because of this, they may use the term "billing a client" instead of "invoicing a client". In these circumstances, though, they mean the same thing.
Bills are a subset of invoices - In some cases, the "bill" is considered the list of goods and services being purchased and the total amount to be paid. Invoices differ from this in that they contain specific additional information (as detailed above).
Bills are what the recipient calls an invoice - In other cases, "bill" and "invoice" refer to the exact same document. However, the issuer will refer to it as an "invoice", and the recipient will refer to it as a "bill".
Bills are a collection of invoice amounts due - Another case is when a business issues a customer multiple invoices over a period. They may follow up with a "bill" which details the total amount outstanding to be paid.
Invoices vs purchase orders
Invoices are sent from the seller to the buyer to request payment, whereas purchase orders (commonly PO or PO's) are sent from the buyer to the seller to officially confirm an order. In the order of the sale, purchase orders are sent first as a record of what the buyer is requesting, with invoices typically sent after goods or services are delivered, requesting payment for what's been provided.
What’s included on an invoice?
When creating an invoice, there are certain basics to which you must adhere if you want to present a professional image and increase your chances of getting paid on time.
The word ‘Invoice’ marked clearly at the top of the document
A unique number or reference
The name, address, and contact details of the individual or company issuing the invoice
The name and invoice address of the person or organisation being invoiced
A description of what product or service the invoice covers
The supply date of the goods or service
The date the invoice was issued
The amount of money owed, detailing the VAT sum, if applicable, or any pre-agreed discounts, plus the overall total due
The invoice due date (deadline for payment to be made)
Invoice basics
Be clear
You must clearly and prominently state on the document that it is an invoice, and every invoice should have its own unique reference number.
Unique reference numbers
You must decide upon and implement a referencing system for your invoicing, both for your own record-keeping and to make life easier when completing year-end accounting and calculating tax returns.
One straightforward method is to use the year plus sequential numbers; for example, Inv0742023 would represent invoice number 74 in 2023, matching a client and a payment in your banking record.
Your Contact details
You must include the contact details of your business or organisation on your invoices. Adding all your contact information, including email addresses and telephone numbers of relevant people in your organisation, will help speed up settlement times should there be any issues or questions relating to the invoice.
Depending on the size of the company you are dealing with, their accounts department may not be aware of all projects and suppliers, so including the contact details of the relevant people in your business could be useful.
As well as contact details, it is prudent to spend some time creating an attractive invoice template that includes your company logo and website address. A well-designed invoice adds to the feeling of professionalism and can offer brand-awareness opportunities with the logo and website address displayed.
Customer contact details
It's essential to put the correct company name and address on any invoice you send. Any invoicing error, such as an incorrect address, will likely render the invoice invalid. Incorrectly addressed invoices are likely to be rejected by HMRC when submitted as outgoings in a tax return.
Description of service
Including a description of the goods or services delivered on the invoice is a good idea. For complex services, you can break down the costs presented on the invoice and describe the number of hours, the volume of goods, and services delivered.
Again, adding this information clarifies precisely what the invoice is for and may speed up settlement time. Invoices without this information may face delayed payment if the accounts department needs to check the scope of work details with the commissioning department.
Date(s) of service or supply
Adding the service dates to an invoice provides more critical information to the receiving company.
The date of supply on invoices for goods tells the company that they have been delivered or will be delivered on a specific date. Add the date range covered by the invoice for services that span a period. For example, billing for a service that runs for a year may happen quarterly, with each invoice specifying the dates covered in that quarter.
Date of issue
The issue date is useful for accounting purposes, particularly if accounts are prepared on an accrual basis. For goods, an invoice is typically raised after the goods are delivered, which will be the invoice date. However, depending on the dates of supply, invoices will often be submitted in advance or split into multi-parts and billed at intervals for services that cover periods of time.
The amount
The sum to be paid is rarely left off an invoice; however, for transparency, you should go further and break down the total amount into its constituent parts.
The different parts that could make up the final total include any discounts, VAT, surcharges, unit costs, labour costs, expenses or any other charges relating to the goods or services delivered.
The due date
All invoices must have due dates. An invoice without a due date could, in theory, remain unsettled forever! Adding the due date to an invoice tells the receiving business the date by which they must pay.
Including the due date won't always get your invoice paid on time, but it does provide a date at which you can begin chasing payment.
The problem of late invoice payments
Late payments have historically been a major disadvantage of invoicing and are a result of how invoice payments are collected.
According to the Institute of Chartered Accountants in England and Wales (ICAEW), late payments are a barrier to growth, with over 50% of UK businesses noting that late payments:
hold back growth,
make it difficult to pay staff fair wages
cause delays in payments to suppliers
The ICAEW also note that:
"Late payments are expected to grow significantly in the coming months, following rising inflation and interest rates, with UK businesses less likely than their European peers to make growth a priority."
Eliminate late payments on Invoices
The reason that invoices have such a poor on time settlement record is that the invoicing process hands control of payment collection to your customer. GoCardless gives you back control of your payment collection process ensuring invoices are automatically paid on their due date.
'Push' payments are the problem
Most invoices are paid via 'push' payments - payments that are controlled by the payer, such as manual bank transfer, card payment, or payment by cheque.
Push payments require the payer to take action to 'push' the payment to you. This action could be logging into a banking app and making a transfer, navigating to an online payment page and entering card details, or even writing and posting a cheque.
The point is, this requires manual action from your customer and this creates a lot of friction in the payment process. There are many reasons why a customer or an accounts team may not take the required action in time - busy, sick, on holiday, maybe the accounts team only make payments at certain times, your invoice has not been added to their system, and so on.
'Pull' payments are your solution
Pull payments are authorised by your customer and put you in control of your payment process. Payment collection is automated, and funds are always collected on the dates set by you without your customer needing to take any further action.
Switching collection methods on your invoices from manual 'push' payments to automated 'pull' payments eliminates late payments and gets you paid on time, every time. GoCardless also enable you to extend automation to payment admin, reducing time-consuming manual admin and saving your finance staff significant time.
GoCardless customer Nathan discusses how easy it is to get paid on time with GoCardless in the 60-second video below:
GoCardless makes it easy to accept Direct Debit. Automate payment collection. Reduce manual admin. Get paid on time, every time.
Types of invoice
Pro forma Invoices
A pro forma invoice is an invoice sent in advance of a shipment of goods where payment, or at least part payment, is required before the delivery of the goods.
Pro forma invoices are often estimated and are typically used in international transactions to satisfy customs regulations as they contain critical information on the weight and transportation charges of goods.
Commercial Invoice
A commercial invoice is typically used in foreign trade as a customs declaration. Commercial invoices do not need to adhere to a precise format, but they should include the following:
details of buying and selling parties
description of the goods to be shipped
the country of origin/manufacture
the Harmonized System codes for the items
a signed statement confirming the invoice is true
Since Brexit, UK businesses exporting to the EU will likely need to raise a commercial invoice, but transactions and shipments between two EU countries do not require a commercial invoice.
Credit notes
A credit note is issued when an invoice has been raised for ordered goods but there is a discrepancy between the order and what was delivered. This discrepancy could be down to an error when raising the invoice originally, loss of goods in transit, damaged goods, cancellation of purchase or other reasons.
A credit note covering the cost of the lost/damaged/cancelled goods is issued to balance the accounts of both parties involved.
Credit notes can be issued for both incoming and outgoing payments and can be used to show that an amount that was paid by a customer has been returned or that a customer's due payment on an invoice was cancelled.
Timesheet Invoice
Timesheet invoices are used to calculate how much a business charges a customer for a particular piece of work based on the number of employee hours spent on the project.
Timesheet invoices are used on projects where the client is charged per hour and represent an easy way for businesses to keep track of hours expended on a specific project or client. Using timesheet invoicing has also been shown to increase employee productivity.
Retainer Invoices
Retainer invoices function in a slightly different manner from the common perception of a ‘retainer’.
In popular culture, a retainer is commonly understood to be a situation where professional help is always available as required based on a retainer payment. The payment is made not for the professional help itself but for having it available when needed.
With a retainer invoice, advance payment is collected from the customer for forthcoming goods or services. However, the funds are only due if the goods or services are delivered. If not delivered, then the supplier will be liable to return the advance payment to the customer.
In this way, retainer invoices tend to represent liabilities rather than income on a company balance sheet.
Recurring Invoices
Recurring invoices come into play when a customer orders the same type and volume of goods or services on a weekly, monthly or another regular cadence.
Recurring invoices will be almost identical except for the invoice number and the invoice date.
VAT invoice
A VAT invoice is issued when a sale of goods or services is liable for Value Added Tax (VAT), a UK sales tax.
Before raising VAT invoices, your business needs to be VAT-registered. According to HMRC, you must register for VAT if:
your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
you expect your turnover to go over £85,000 in the next 30 days
If you are not registered for VAT, then you must not charge VAT nor send VAT invoices.
For businesses that are registered for VAT, a VAT invoice must contain specific information that includes all the usual invoice requirements, plus:
Your businesses VAT number
The price of items (without VAT)
The rate of VAT charged on each item
The total amount due (without VAT)
The total amount of VAT due
The total amount, including VAT
eInvoicing
As the name indicates, eInvoicing is the use of electronically created and transmitted digital invoices. However, eInvoicing refers to a very specific format of electronic invoices.
According to Directive 2014/55/EU these electronic invoices must be “transmitted and received in a structured data format which allows for its automatic and electronic processing”.
The whole point of eInvoicing is to allow a high level of digital automation to replace physical manual processing. To do that, the structured data in an eInvoice must be in a machine-readable format, so the receiver can automatically import the data into their accounting system.
How do invoices work?
Your customer agrees to purchase goods or services from you.
The details of the sale, and the parties involved (i.e. you and your customer's businesses), are dictated on an invoice - a document which is an official request for payment.
You create the invoice (which can be done manually or via specialist software, in paper or electronic format) and issue it to your customer.
Upon receiving the invoice, your customer has a period of time in which they've legally agreed to pay you by (commonly 30 days, but many variants exist).
Your customer makes the payment in full, and you reconcile the invoice after receiving this payment to complete the transaction.
The invoicing process involves a lot of manual administration, not just in the raising and sending, but also in regard to reconciling payments and chasing invoices that are past their due date. That's why automation is so important and why many businesses employ modern invoicing software to save time.
Modern invoicing software
Invoicing software makes it easier to create and send invoices, automating a previously manual task. When deciding which invoicing software is the most suitable for your needs, you’ll first have to decide whether you need invoice-specific software or whether a fuller accounting package software that includes invoice creation would be better.
Invoice-specific software should allow you to do two things quicker and more efficiently:
Create invoices more quickly, with less work than by using manual methods.
Allow you to collect online payments
If you feel more functionality would be useful, then you will probably want to consider a more comprehensive small business accounting software option.
What can you do with modern invoicing software?
Modern invoicing software offers multiple functionalities, and there are many options to choose from depending on the unique requirements of your business.
Typically, invoicing software will allow you to do the following:
generate invoices directly from contracts or estimates
send the invoice via email, text, or regular post,
accept a variety of payment methods on your invoice
Invoicing software should be able to integrate with other accounting software that you use and allow for further automation of your payment collections and accounting process.
Read more about online automated invoicing software here.
Advantages of using invoice software
Automation - Invoice software allows you to complete multiple tasks with minimal input. Creating and sending invoices is largely automated, and all customer, payment and invoice details are stored for future reference.
More accuracy - using software greatly reduces the chance of human error and invoices being sent out incorrectly or even sent to the wrong address, person or business.
Easy accounting - using invoice software makes life easier when it comes to tax returns and other accounting requirements. All data is stored in digital format, making it easily available and accessible whenever information is required.
Professional look - invoices created by dedicated software will often have a more professional appearance than manually created invoices. Remember that the templates offered in invoicing software have been designed by professional designers and will offer a positive impression of your business.
Paperless office - being environmentally friendly is no longer just for committed eco-warriors or marketing gimmicks - it has very quickly become part of everyday life.
Eliminating paper from your office won’t only save the planet's trees, but it will also save you and your finance team multiple headaches as you won’t need to search for paper files and documents or try to understand an important hand-written note in some illegible scrawl.
Invoicing and payment terms
Unless you have agreed on alternative payment terms with a customer, UK rules dictate they must pay you within 30 days of receiving your invoice for the goods or services provided.
Some businesses do operate a different model. One familiar scenario is larger companies requiring that smaller suppliers accept payment terms of 90 or even 120 days.
Some companies choose to offer clients discounts for early settlement or payment in advance. Increasingly, SMEs are going further to protect themselves from late payments and are asking for invoices to be settled within as little as seven days.
The UK is fairly typical among its neighbours in Europe in its approach to invoicing, with payment terms of 30 days from receipt of an invoice being commonplace in most European countries.
How quickly invoices are paid depends partly on how the document is issued. Manual invoices are slower both to deliver and to be processed at the other end. But modern, automated methods can ensure payments are made quickly and efficiently, even immediately.
Eliminate late invoice payments with GoCardless
GoCardless provides a solution for this issue by eliminating late payments almost entirely.
By enabling businesses to collect payments automatically on pre-scheduled dates, 78% of GoCardless merchants have reduced average debtor days and get paid 47% faster than the average SME.
Schedule the payment and notify your customer in just a few clicks. Once your customer has approved the mandate, no further action is required. The funds will be pulled automatically from the customer's account on the scheduled date, meaning you get paid on time every time.
Eliminate stressful & costly late payments with automated invoice collection. GoCardless is quick & easy to set up and gets your invoices paid on time, every time.
“Overdue invoices are virtually non-existent and that makes us happy!” - George Ford, Director, Veriphy
Tips for invoicing
Like most things in life and business, everything comes down to time and money - it’s the same with invoicing. Here's some tips for saving time and money on your invoicing process.
1. Use invoicing software
Using invoicing software will save you (or your finance team) a good amount of time, which can be put to better use in other parts of the business.
So tip one is to use software to automate your payment process, including raising and sending invoices.
Once you have your billing process working smoothly, the next problem to overcome is actually having your invoice settled on time. Late payments on invoices are a major problem for SMEs in the UK. Whilst 30-days is the accepted period within which an invoice should be settled, there is nothing to quickly and easily enforce this, leaving you at the mercy of your customers as to when you get paid.
2. Use a pull payment method such as Direct Debit
Tip 2 is to use a ‘pull’ payment method, such as Direct Debit, to automate payment collection and ensure that invoices are always paid on the due dates you set.
GoCardless enables businesses to collect invoice payments automatically via pull payments. With the user-friendly merchant dashboard, you can set up payments in just a few clicks and easily automate invoicing and payment collection.
Invoicing FAQs
What is an invoice address?
An invoice address is the legal address of the buyer or the address where they receive correspondence. It is differentiated from a shipping address (or delivery address), which is the address where goods or services are to be delivered. In some cases, these addresses may be different, and in others, they may be the same.
What is an invoice due date?
An invoice due date is a date upon which full payment of the invoice total is due. If this date passes and the full amount hasn't been paid, the invoice is considered overdue.
Eliminate stressful & costly late payments with automated invoice collection. GoCardless is quick & easy to set up and gets your invoices paid on time, every time.
“Overdue invoices are virtually non-existent and that makes us happy!” - George Ford, Director, Veriphy
