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What is an invoice and how does invoicing work?

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 done, 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, 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.

What’s included in an invoice?

  • 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)

What is an invoice address?

An invoice address is the legal address of the buyer or address where they receive correspondence. It is differentiated from 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 some cases they may be the same.

What is an invoice due date?

An invoice due date is the 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.

How do invoices work?

  1. Your customer agrees to purchase goods or services from you.

  2. 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.

  3. You create the invoice (which can be manually or via specialist software, and may be paper or electronic) and issue it to your customer.

  4. 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).

  5. Your customer makes the payment in full, and you reconcile the invoice after receiving this payment, to complete the transaction.

Invoicing and payment terms

Unless you have agreed 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 being 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 payment, 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. But this does vary:

  • Scandinavian businesses typically employ a payment deadline of 14 days

  • Spanish firms set payment terms of 45 days on average

  • Companies in Greece and Italy demand payment within 50 days or more

How quickly invoices are paid often depends in part 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.

Invoices vs bills

A bill is often considered to be interchangeable with "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" in place 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 being sent typically after goods or services are delivered, requesting payment for what's been provided. The type of information included in a PO is very similar to what's included in an invoice (see below).

What's included in a purchase order?

  • The words 'Purchase order' marked clearly at the top of the document

  • A unique number or reference

  • The date the PO was issued

  • The name, address, and contact details of the individual or company issuing the PO

  • The name and address of the supplier being sent the PO

  • The delivery address of the goods/services being provided (+ the name and contact details of the person accepting delivery or overseeing the works)

  • The delivery date of the goods/services

  • A description of the goods/services the PO covers

  • The cost of each item, quantities ordered, and the total cost of the order

  • The payment terms (period for payment to be made)

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