What Is an Invoice and What Should It Include?

Invoicing is a critical part of your business’s accounting process. Not only must invoicing be done regularly, but it must also be done properly to ensure reliable cash flow for your business and to maintain positive relationships with your customers. Your customers want to pay you in a timely manner. When you invoice on time and include the correct information, you help them do so.

In this article, we’ll take a closer look at exactly what an invoice is, as well as the information you should include in order to help your customers pay you quickly and accurately.

Article Table of Contents:

What Is an Invoice?

An invoice is a document used to bill a customer for a product or service you have provided. As compared to sales receipts—which are issued when a customer pays at the time of purchase—invoices are created shortly after the sale and are sent to the customer for payment at a later time.

If you use accounting software, you’ll likely be able to easily create and send invoices through this software. However, there are also specific invoicing software systems—including free options—you can also use to help you streamline the process. Of course, it’s also simple enough to create invoices without software of any kind.

What to Include on an Invoice

Even though accounting and invoicing software packages allow you to easily customize your invoices to your specifications, it’s still important to understand the components of a properly issued invoice and how to write an invoice yourself, especially if you’ll be taking a more DIY approach and making your invoices using Microsoft Word or Excel.

General Invoice Information

Every invoice you issue should include the following general information:

  • Your company name and contact information. Your company’s name and contact information should be prominently displayed at the top of your invoices. This is often displayed in the top left-hand corner of the invoice—where a return address on a letter would go—though sometimes it is in the center of the invoice or even at the top right-hand corner. For a more professional touch, include your company’s logo next to your company name and contact information.
  • The customer’s name and address. Including your customer’s name and address—even if it’s only their email address—on your invoice lets them know the invoice is intended for them. It also helps you remember who you billed for the product or service should you need to refer back to the invoice later. This information typically goes where an address on a formal letter would go—near the top left-hand corner, below your company’s information.
  • Reference number (invoice number). The reference number lets both you and your customer enter the invoice into your accounting systems in a trackable manner. It also ensures you and your customer have a common reference point should you need to discuss any aspect of the invoice. Invoice numbers are typically sequential and are printed near the top of the invoice.

Billing Information

Billing information is the “meat and potatoes” of the invoice. Including the proper billing information allows your customers to quickly reconcile your invoices against their internal records and approve the bills for payment. An invoice’s billing information also tells your customer when you expect to be paid.

The following should be included in your invoices’ billing information:

  • Invoice date. The invoice date is the date on which you create the invoice and bill the customer. This is sometimes the date on which you sold the product or service, but it’s often a few days later. If there is a lag between the date you make a sale to a customer and the date you invoice them, you can include the sale date (or dates of service) on the invoice for the sake of clarity.
  • Line items. There is a delicate balance between providing too little information on an invoice’s line items and providing too much. Ideally, you want to include the quantity of each item sold—be it time, a tangible product, or a billable expense you are passing along to the customer—a description of each item, the price per unit, and the total for each line item.

    For example, if you sell your customer 10 widgets at $5 each and 15 whatsits for $10 each, the invoice line items might look something like this:
Quantity Description Price Total
10
Premium Widgets
$5.00
$50.00
15
Quality Whatsits
$10.00
$150.00

 

  • Subtotal. The subtotal line on your invoice is the total amount due before sales taxes are assessed or discounts are applied. This line lets your customer quickly compare the invoice total to their records and determine if further reconciliation is needed before they pay your bill:
Quantity Description Price Total
10
Premium Widgets
$5.00
$50.00
15
Quality Whatsits
$10
$150.00
Subtotal
$200.00

 

  • Tax. If you are required to collect sales taxes from your customers, this should be listed as a separate line item on your invoice. For the purpose of our example, let’s assume your customer’s sales tax rate is 5%, or $10 ($200 x 5%):
Quantity Description Price Total
10
Premium Widgets
$5.00
$50.00
15
Quality Whatsits
$10
$150.00
Subtotal
$200.00
Sales Tax (5%)
$10.00

 

  • Discounts. Discounts can be a little tricky. Depending on state and local sales tax laws, discounts might be calculated before or after sales tax is calculated. For the purpose of this example, we’ll assume no discounts are due to the customer. If they were, though, they would appear either between the subtotal and the sales tax lines, or they would appear after the sales tax line.
  • Total due. The final billing information component is the total due. This is the line that sums up the invoice and tells your customer exactly what you expect to be paid, provided the customer doesn’t incur interest or penalties for late payment or take advantage of early payment discount terms (more on this in a minute):
Quantity Description Price Total
10
Premium Widgets
$5.00
$50.00
15
Quality Whatsits
$10
$150.00
Subtotal
$200.00
Sales Tax (5%)
$10.00
Total Due
$210.00

 

Generally speaking, you want to make this line stand out, either by printing it in bold font or by using a different font size or color. This makes it easy for your customers to know what they need to pay you.

Payment Information and Terms

The conditions you set forth when you invoice a customer are known as the invoice payment terms. These terms should be included on each invoice you send. They include:

  • Invoice due date. This is the date by which you expect to receive payment from the customer. After this date, the payment is considered late and might be subject to interest or penalties.
  • Days to pay. The days-to-pay portion of the invoice tells your customer how many days they have from the invoice date to make their payment. Days to pay is often represented as “Net 30,” “30/60/90,” or some variation of these terms. It can also include early payment discount provisions, such as “2/10 Net 30,” which means the customer can take a 2% discount if they make their payment within 10 days.
  • Interest and penalties for late payments. If you will assess interest or a penalty to payments made after the due date, these terms should be clearly spelled out on the invoice. This information is typically included on the bottom of the invoice so the warning is clear without being threatening.
  • Payment methods accepted. Let your customers know how they can pay you. List the forms of payment you accept—cash, check, ACH, wire, or credit card—as well as any payment plans you are extending to them on the invoice. You can even include a payment link so customers can pay you easier.
  • Remittance address. If your customers need to send payments to a lockbox or another address other than your company’s general mailing address, include this address on your invoice.

Notes or Memos

Although not strictly necessary, it’s common for businesses to include notes or memos on their invoices. This can be anything from “Thank you for your business!” to dates you plan for your business to be closed for holidays or vacations. These notes are typically included on the bottom of the invoice so they are easy to see but don’t detract from the more important parts of the invoice.

When to Create an Invoice

Proper invoicing is critical to both sides of the sales relationship. When you invoice your customers is just as important as what you include on your invoices.

If you have a contract with your customer, you should take steps to ensure you invoice your customer following the schedule laid out in the contract. This could be at the completion of a project, or it could be at different project milestones.

If you are invoicing upon completion of a sale or a project, though, you might not have a formal contract in place. In this case, you should invoice as soon as you possibly can—preferably within a week of the delivery of the product or service.

Why Invoices Are Important

Invoices are an important part of your business’s accounts receivable process. Accounts receivable are the amounts your customers owe to you and which are payable at some point in the future.

For many businesses, creating an invoice is the first step in recording accounts receivable. Failure to record accounts receivable correctly can lead to lost revenue in your business. It can also lead to poor customer relations should you detect the error at some point in the future and your collection efforts result in a cash flow crunch for your customer.

Just as your accurate bookkeeping and cash management rely on accounts receivable being properly recorded on your end, your customers’ accurate bookkeeping and cash management rely on accounts payable being properly recorded on their end.

When your customers receive your invoices, they enter the bills into their accounting software to be paid later. Failure to record accounts payable correctly can lead your customers to overcommit funds, which in turn can lead to cash shortfalls and profitability challenges for them. And failure to issue your invoices correctly and in a timely manner can lead to your customers’ failure to record accounts payable correctly. It truly is a symbiotic relationship.

Invoices vs. Bills

The terms “invoice” and “bill” are often used interchangeably. When you send an invoice to a customer, you are said to bill them. This can cause some confusion, especially when you are trying to determine which form to use in your accounting software to create an invoice for your customer.

An invoice and a bill are the same document. The difference between the two terms lies in the perspective of the person issuing or receiving the document. To the seller—the person or business who issues the document—it is an invoice. To the customer, it is a bill. Again, the document is the same from either perspective; it is simply called by a different name for the sake of clarity.

With so many similar-sounding terms, you may also be wondering how invoices differ from other commonly referenced documents in the ordering and payment space. For more information, check out these guides:

Invoice Examples

If you don’t have accounting or invoicing software, you still have plenty of options to create invoices that are both professional-looking and on-brand. Some accounting software platforms, like QuickBooks and FreshBooks even offer free invoice templates anyone can use.

These invoice examples will guide you through creating invoices using:

If you’re not a Microsoft or PayPal user, you can also find some great invoice templates from Google Docs. Once you’ve created your own invoice, simply send via email to your client. (Sending a paper copy in the mail is also an option; however, this method has a greater chance of failed delivery.)

The Bottom Line

Creating invoices is a critical part of your sales process, but that doesn’t mean it has to be complex or time-consuming. Accounting software packages and online invoicing systems make it a breeze to create invoices quickly and accurately. But even if you create your invoices manually, armed with the information in this article, you can rest assured that you are including all the details you and your customer need to ensure your invoices are accurate and easy to pay.

Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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