A guide to invoicing

Whether you’re a new small business owner or a seasoned restaurateur, sorting out your invoicing can be daunting. However, with the aid of this Dojo guide, we’ll help you become fully fluent in the language of invoices. So you can spend more time building your dream business and less time faffing with finances. 

In this guide, we’ll answer the burning question of ‘what is an invoice?’ and run through its core functions. We’ll also highlight the various invoice types you may come across, as well as covering key questions like, ‘what is an invoice used for?’ and ‘what is a PO number on an invoice?’. Read on as we unpack it all. 

Invoices: Explained

What is an invoice? In simple terms, an invoice is a document that a seller uses to request payment from a buyer. This can refer to documents used for both selling and/or receiving physical goods and services.

A well-written invoice clearly outlines the number of products sold, the price they were sold at, any shipping and handling fees, as well as clarification of when payment is expected.

An invoice is a legal document that can be delivered once goods or services have been provided. Or, you can send an invoice before work begins or products are delivered. The latter method is called a proforma invoice, but we will touch more on that later.

When goods are itemised and documented (and the names of the client and seller are also listed) invoices can also serve as legal transaction records.

A quick history of invoicing

Mesopotamia

While invoicing may be new to you, documenting buying and selling information can be dated back to ancient Mesopotamia. These ancient transactional notes were carved into clay and stone tablets and were usually used for personal accounting.

Invoicing in The Roman Empire

It’s thought the Romans were the first to start scribing and delivering promissory notes. While not as detailed as modern-day invoices, these handwritten Roman notes were mainly used to record transactions. They would also signify that payments for goods and services had been completed.

The invention of the computer

Thanks to the revolution and the invention of the computer, there is no longer a need to handwrite invoices. Instead, most invoices are now created and sent electronically. Some countries’ governments have even made the use of electronic invoicing compulsory.

Electronic invoicing systems

Nowadays, most invoices are created electronically and sent online via email. Payments are also made safely and securely online.

To make invoicing even easier there are now invoice generators available. These electronic systems allow you to manage your invoices, track an invoice journey, and also create end-of-month spending reports.

Mobile invoicing

Furthermore, due to the development of Specialised SaaS (Software as a Service), it’s now possible to automatically send invoices from your mobile device.

It’s fair to say we’ve come a long way from clay and stone tablets, right?

What is an invoice used for?

Now that we know the primary definition of an invoice is to record and request payment for delivered goods and services, we can delve into what invoices should be used for. This could be anything from produce being delivered from your factory to a grocery store or time spent creating a graphic image for your local football team. 

While the core function of an invoice is to make sure you’re being correctly paid for what you've sold, there are a plethora of other benefits to invoicing.

How do I read an invoice?

Now that you understand what an invoice is, it’s vital to be able to read one. To give you a hand, we’ve created a handy guide to help you read Dojo-specific invoices here. 

If you’re wondering how to read more generic invoices, we’ve got you covered, read on to find out more.

What are the functions and reasons to use an invoice?

Request timely payments

You’ve delivered the work. Now, it’s time to get paid. An invoice is a legally binding contract that will allow you to document agreed payment terms and request payment within the agreed timeframe.

Tracking payments

You’re a business, and you’re busy. When there’s alot going on it can be very easy to lose track of what payments you’re owed and who has to pay what. Using a consistent invoice system can help your bookkeeping become more organised. In a nutshell, it means that you don’t have to worry about trying to remember each sale or order, so you can focus on the other things that matter. Plus, you'll be less likely to miss payments because of a clerical error.

Tracking inventory

If you’re a business that sells physical goods, you’ll need to keep track of your incomings and outgoings. An invoice will show you exactly when a specific volume of items was sold. It also shows you who purchased them. This will help you to update and keep track of your inventory.

Record tax filings

Owning your own business means you need to pay your taxes. Creating and keeping invoices helps with accounting and filing taxes. It also aids the creation of end-of-year reports and filing your VAT.

Managing sales

As we’ve mentioned above in our ‘what is an invoice?’ section, it’s primarily a way to keep a legal record of transactions. This means that if there is any discrepancy with the sale, you already have all of the information to hand to be able to cross-check and use to make an informed decision about your next steps.

Forecast future findings

Past invoices are sometimes a good indication of your business's future. You can often forecast your expenditure and profits by compiling historical data found via invoices.

Legal protection

We’ve also outlined that an invoice is a legal document. This means that by invoicing, you have proof that there is a binding agreement with your client for a certain number of goods to be delivered at a set price.

What are the different types of invoices?

The next stage in answering the question ‘what is an invoice-?’ is understanding the different types of invoices available.

Generally speaking, you don’t have to get technical with invoices when talking to your clients. Calling it an “invoice” is just fine. However, there are various types of invoices you should know about and understand when and where to use them.

What is a sales invoice?

A sales invoice is a legal document to inform a client or a buyer of the goods or services they have purchased. It also includes names, addresses, total payment amount and terms. This is the most used type of invoice and it may be the one you’re most familiar with.

What is a proforma invoice?

A proforma invoice is generated by a buyer or the seller before service or goods have been supplied. It’s usually issued once the sale has been agreed but the final details are yet to be confirmed. However, a proforma invoice isn’t legally binding. This means you will still need to follow up with a sales invoice once the products or service have been agreed upon or received.

What is a recurring invoice?

Recurring invoices are supplied to clients or customers with repeat transactions. What is an invoice like this predominantly used for? Typically for a subscription to a monthly streaming service or a yearly subscription to a membership.

What is a credit note?

A credit note is also known as a credit invoice. It’s a document which is issued to customers and clients when goods are returned. This could be for various reasons, such as damaged products or printing mistakes. The chargeback value will appear on your invoice as well as the original transaction.

What is a timesheet invoice?

Timesheet invoices are issued from sellers to buyers. What is an invoice like this used for? It is for charging for services or time spent, often on an hourly basis. These are predominantly used by freelancers and contractors.

What is a debit note?

A debit note is also known as a debit invoice. This document outlines the debt that a buyer owes a seller. Debit notes are often used when a delivery has been made for more than was originally requested.

What is a commercial invoice?

Commercial invoices are generated when sellers are sending products outside of the UK. Unlike a sales invoice, a commercial invoice is not usually used to claim payment. Therefore, you need to provide a sales invoice alongside a commercial invoice.

What is an interim invoice?

Interim invoices are a way to manage cash flow between buyers and sellers better. They are used to collect partial payments at various working milestones. For example, if you are providing furnishings for a global coffee shop chain. You may be issued monthly interim invoices instead of a large sales invoice at the end of the project.

What is a retainer invoice?

A retainer invoice is often used to secure advanced payments. Creative digital agencies often use retainer invoices to request payment before the completion of work. The payment is then deducted from the overall sum.

What is a past-due invoice?

Past-due invoices are documents that have been issued but haven’t been paid on time. Any invoice a customer has failed to pay on time becomes a past-due invoice. It is best practice to pay invoices on time to avoid potential legal fees. Having past-due invoices may also hurt your cash flow. 

What is invoice financing?

You may not have come across the term invoice finance before. If you haven’t, then invoice financing is when a money lender uses a past-due invoice as a security measure. This could be to secure funding. It is also a method for businesses to access funds against amounts due from various customers.

How to read an invoice

Now we’re going to dive a bit deeper into how to recognise a legitimate invoice and read an invoice. 

What are the different elements of an invoice?

We’ve already established that asking ‘what is an invoice?’ will give you a broad answer. This is due to the variety of invoice types available. However, all legally-sound documents should feature the same eight elements.

The word ‘Invoice’ is marked

Whether you are a buyer or a seller, you need to make it crystal-clear that the document you are sending is an invoice. To distinguish, the word ‘Invoice’ should be marked at the top of the invoice.

Invoice number

What is an invoice PO number? Also known as a purchase order (the PO part) or an invoice number, this is a unique code specific to the issuer's bookkeeping methods. It may vary from invoice to invoice and can sometimes include letters as well as numbers. The purpose of an invoice PO number is so that the issuer can keep track of invoices they’ve sent out. If you’re sending invoices, it also helps you keep track of invoices that need to be paid.

Date of the invoice sent

Invoices usually feature the date sent in dd/m/yyyy format. This is for categorisation purposes to determine the due date of payment. It’s worth noting that different countries may format dates differently so always check which date format is being used for the invoice so you don’t miss a payment. 

Company and customer information

What is an invoice address? For accounting purposes, there are usually two addresses present on an invoice. One is the seller's address. The other is the buyer's address. These details allow both customers and clients to file the correct information. Included should be both names, billing addresses, shipping addresses (if different), phone numbers and email addresses.

A clear outline of products or services provided

When it comes to creating an invoice, all the products or services provided should be outlined. Each unique product or service needs to have a description, a quantity and a cost per unit price.

Sales tax

To help with accounting, sales tax should always be marked on an invoice. This is how much tax should be paid for the products or services.

Total amount due

Following the outline of products or services provided, there should be a total amount due figure with currency. This is how much the receiver needs to pay the buyer for the goods they have provided.

Terms and conditions

Before receiving the invoice, terms and conditions should have already been agreed upon. This includes payment due dates and penalties for non-payment.

Personalised note

There should always be a personalised note at the bottom of an invoice. This could be a custom thank you note. Or, it could be a line of text to reassure the receiver that if they have any questions they can contact you.

For more tips and advice on running a small or medium business, be sure to head to our blog for more.