Invoicing can seem like a 'hygiene factor' when you're thinking about running a successful business, in that it's viewed as a necessity, but not a differentiator. But proper invoicing practice is a vital part of ensuring a healthy cash flow, which in turn is a vital part of growth.
“Cash flow is the lifeblood of any business, and it only becomes more important as you scale,” says Adam Maurice, director of professional services firm Fusion Consulting Group.
Not only do invoices offer written verification of a client’s obligation to pay, but they’ll also protect you in the event of legal disputes. They’ll help you keep track of customer payments, and ultimately, invoicing is a part of good customer service; when you issue an invoice to a client in a timely way, you’re showing them you run an efficient business.
This article will explore the different variations and types of invoices and how they can be used to properly support your business.
What are the different types of invoice?
Invoices can come in several forms. Here are some of the most commonly-used variations:
- Sales (standard) invoice: sent from a business to a buyer to request payment for a particular product or service. It becomes overdue when a client or customer hasn’t paid an invoice within the specified payment period.
- Retainer invoice: sent to a client before work starts, requesting an advance payment for goods or services. This works like a deposit or pre-payment, and helps ensure reliable cash flow for the business as it’s often used when working with a client on an ongoing basis.
- Timesheet invoice: used to bill clients for the number of hours that your staff have worked on their project.
- Proforma invoice: an ‘estimate’ sent to a buyer before a sale is confirmed. A proforma invoice serves as a placeholder until the buyer confirms they would like to proceed with the sale (or iron out the finer details).
- Credit/ debit invoice: invoices provided to reflect a refund due to overpayment, or to request more money if they have been underbilled.
- Final invoice: the last invoice sent to a client, which outlines all work done, and any outstanding balance due.
- Collective invoice: used when a business is carrying out more than one project for a client. To simplify invoicing, and to minimise transaction fees, they can choose to issue a single 'collective' invoice.
The types of invoice a business most commonly uses will often depend on the nature of its product or service. More specifically, whether it deals with single transactions or project work. While credit/ debit invoices, final invoices and collective invoices are commonly used across both scenarios, other invoices will be more commonly (or even exclusively) used in just one.
Invoices used for single transactions
Below are the types of invoices typically used for one-off transactions between a buyer and seller.
1. Sales (standard) invoice
A sales invoice will contain fields including the invoice number, the company and seller’s information, date of issue, items or services provided, discounts and tax (if any), the total price, payment methods such as bank details, and the date by which the payment should be made.
GiveTap rents card machines to charities and issues sales invoices for these using a cloud-based software brand. “These items are sent to charities ahead of fundraising events such as gala dinners,” explains Kane. “We take payment ahead of delivering goods.”
Another option is to take a portion of the payment upfront - known as an 'interim invoice'.
“We typically request 50% upfront, so that we have firm client commitment, and then the balance on completion so that both sides are compelled to see things through,” says Fusion Consulting Group's Maurice.
2. Proforma invoice
A proforma invoice is a ‘good faith’ agreement between a business and a client so the customer has an idea of the estimated cost ahead of time.
“Prior to a fundraising event, a charity may order print materials through us – such as posters, table talkers or wall vinyl – that draw attention to a charity’s cause," says Chris Kane, head of new business at GiveTap. "We send a proforma invoice, which is basically a quote. This includes estimated costs, delivery details, and items included. We’ll follow this up with a sales invoice if they go ahead with the order.”
3. Commercial invoice
A commercial invoice is used by businesses that ship products internationally. The invoice will contain information about the export, such as the country of origin, the tariff payable, and how it’s been transported.
Invoices used for project work
Other invoice types are often used when a business works with clients on an ongoing basis.
1. Retainer invoice
To manage your resources as a business and cover any expenses, such as hiring contractors, a retainer invoice requests advance payment for a product or service that will be provided in future. It allows the client to ‘reserve’ your time.
Keeping on top of your invoicing is key to healthy cash flow, but managing vendor and supplier payments can be a tough balancing act, especially when the end of the month draws near and bills are due. With an American Express® Business Gold Card, you get up to 54 days to clear your Card balance¹, allowing you to keep your money in the account for longer and giving you more flexibility in your cash flow².
2. Timesheet invoice
Timesheet invoices are used when a business uses its employees working hours on a project to charge its clients. It is calculated by specifying an hourly labour charge, and multiplying it by the total hours worked. Billing in this way can help with employee productivity as you can easily see if you are over- or under-servicing a client. This approach is used more in certain industries, such as consultancy, marketing, design, and by freelancers.
What to do when an invoice is overdue
When a buyer fails to pay an invoice past its due date, it becomes overdue. At this point, the seller may send a payment reminder, and a penalty fee, stop the work, take legal action, waive the invoice or consider invoice factoring. Invoicing factoring is where a business raises money by selling a percentage of an invoice’s value to a third party. This allows the business to unlock the value tied up in accounts receivables and release the working capital.
To avoid reaching this point, Maurice shares some tips. “Always send your invoice in accordance with the contract, and have terms and conditions which clearly state how and when payment is to be made (including bank details or credit card payment link)," he says.
"Check in with the client to ensure they have received the invoice and then if the invoice is not paid on time - chase it in a friendly but firm way. I was always told that a customer is not a customer unless they pay you."
GiveTap has automated reminders set up in its accountancy platform, which emails clients to chase late payments.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
2. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
