Invoices: What They Are, How They Work & How to Make One🧾

  • Remote Working & Freelancing
Contra Tips
· 8 min read

What is an invoice? Unravel the ins and outs of this document’s functions, types, and essential elements with our expert guide.

Welcome to the world of invoicing! As an Independent or small business owner, billing your clients is essential to your work, but what is an invoice? It’s an excellent way to streamline financial processes and enhance business relationships. More than just a method of collecting payment, an invoice is an essential tool for both Independents and companies alike. 

In this comprehensive guide, we’ll walk you through the invoicing process, the different types of invoices, and offer tips on how you can make invoicing a breeze.

What is an invoice used for? 📁

An invoice is a legal document an Independent provides to a client for the purpose of managing finances. It details the payment the Independent requires for the rendering of products or services to the client. In other words, it’s a comprehensive record of a business transaction that includes the names of the parties involved, the description and price of the goods or services, and the payment terms, including late payments. 

Invoices also play an important role in audits and accounting controls, as they help maintain accurate financial records and ensure legal compliance. 

Invoices vs. receipts and bills: What’s the difference? 🤑

Understanding the differences between financial documents is important for both Independents and their clients. Invoices, receipts, and bills all play their own role in business, and knowing the difference is essential for proper bookkeeping. 

Invoices 📜

An invoice is a document an Independent issues to a client to request payment. It outlines the products or services the Independent has already or will render in an itemized list, associated costs, and payment terms. Invoices require payment a certain number of days after the issuing date (aka a credit period).   

Receipts 🧾

A receipt is a financial document a client receives after they make their payment. It’s proof of the transaction and includes details about the products or services, payment method, and payment date. 

Bills 📄

The term “bill” is often interchangeable with “invoice,” but they’re not necessarily the same. Invoices are payment requests for products or services Independents provide to clients, typically including a credit period allowing payment at a later date. A bill is a request for immediate payment and often does not include a credit period. 

The timing of their sending is their main distinction — invoices are requests for payment for goods or services that Independents have already or will provide, while bills are requests for payments from Independents after the providing of their products or services. 

What are the main functions of an invoice? 👔

Invoices serve a multitude of functions. Beyond just requesting payment, they offer a range of benefits to both Independents and clients, from aiding in accurate bookkeeping to making sure tax time runs as smoothly as possible.

Here are their primary functions:

  • Maintaining records. Invoices provide legal records of sales. This helps businesses determine when a product was sold, who purchased it, and who sold it.  
  • Payment tracking. Payment tracking is another benefit of invoices — they’re an indispensable accounting tool for monitoring payments and outstanding balances.
  • Legal protection. A well-crafted invoice is legal evidence of an agreement between an Independent and a client that offers protection against fraudulent litigation.
  • Easy tax filing. Recording and preserving invoices helps freelancers and companies accurately report their revenue and pay the correct taxes.
  • Business analytics. Examining invoices is a helpful way for Independents to extract valuable insights about their business and customers. It’s also beneficial for pinpointing trends, in-demand products, peak buying periods, and more for creating effective business strategies. 

What are the types of invoices? 💡

There are several types of invoices, each catering to specific situations and requirements. Understanding how they work ensures smoother transactions with clients, improves communication, and helps you run your business more effectively. 

Pro tip: To help you out, consider using invoicing software, invoice templates, or an invoice generator.

The different types of invoices include the following: 

  • Pro-forma invoices. These preliminary invoices estimate the quality, cost, and amount of goods or services the Independent will deliver. They also demonstrate the Independent’s commitment to the client to deliver goods or services by serving as a quote. 
  • Recurring invoices. Recurring invoices automatically renew regularly, often monthly, once all parties agree to their terms. They’re ideal for businesses with ongoing services or subscriptions and are typically for a set amount.
  • Credit memo. Credit memos record payments on a client’s account, acknowledge when a client overpays or underpays, and track credits issued by an Independent. For example, if an Independent overcharges a client by a certain amount, they can issue a credit memo in the same amount for their next purchase. 
  • Commercial invoices. Commercial invoices detail the transaction between a seller and buyer; they also serve as a customs declaration for the shipment of goods across state and international borders.  
  • Interim invoices. Interim invoices break down the cost of a large payment into smaller portions over an extended period. They allow Independents to request partial payment for work on a larger, ongoing project as they complete it. Interim invoices describe the complete work, state the amount, and specify the amount due.
  • Past-due invoices. These invoices are reminders for overdue invoice payments that may incorporate penalty components, like late fees. 

What is included in an invoice? 🐝

A well-made invoice simplifies transactions and enhances transparency for all parties involved in a business deal. Its key components, which play a crucial role in client communication and facilitating payment, include the following: 

  1. Invoice number. This is a unique reference number assigned to each invoice that allows for easy tracking and organization. 
  2. Issued date. This date lets the recipient know the issuing date of the invoice.
  3. Due date. This date is the payment deadline for the invoice recipient.
  4. Seller information. This field indicates the Independent’s contact information, including name and email address. 
  5. Buyer information. This field indicates the client’s contact information, including name and email address.
  6. Payment terms: The payment terms, including the due date, the acceptable payment methods, and any penalties or interest fees for late payment. 
  7. Project. This field is the project name for which the invoice is being issued.
  8. Itemized list. These are the names of the products or services provided, along with the quantity, rate, and total amount owing for each. 
  9. Total due. The total amount due is the cumulative cost of all products or services owing on the invoice, including any sales tax or additional fees.
  10. Memo. The memo section is for adding any additional notes or payment instructions. 

For Independents using the commission-free Contra platform, sending an invoice is simple and straightforward. Contra’s invoices incorporate the essential elements listed above to help you establish a professional payment process that benefits everyone involved. 

Tips for successful invoicing 💥

Invoicing is crucial to managing a successful small business, and adhering to best practices helps foster positive relationships, trust, and client satisfaction. As an Independent, adopting effective invoicing strategies helps you facilitate prompt payments, reduce or eliminate potential misunderstandings, and maintain a steady cash flow. 

The following tips will guide you in establishing a seamless invoicing process:

  • Encourage prompt payments. Encourage clients to pay on time by setting clear payment terms. You can also send friendly reminders leading up to the due date.
  • Add useful descriptions. Add clear, detailed descriptions of your products or services to your invoices. This helps clients understand what they’re being billed for and reduces the likelihood of disagreements.
  • Offer convenient online payment options. These days, many clients prefer to pay online. Allowing different online payment options, as well as online invoicing, makes it easier and more convenient for you to collect payments.
  • Customize the invoices. Tailor the invoices to suit the needs of you, your business, and your clients. This can include anything from fun branding to personalized payment terms, and you can also accommodate client invoicing requirements. 
  • Implement a firm policy for non-payment. If a client hasn’t paid, consider withholding some or all of your work. Establishing a policy of not releasing completed work or withholding services until payment is received reinforces the importance of timely payments and protects your interests.

Contra is here to help ⚡

Contra’s committed to helping Independents thrive in today’s competitive marketplace. Our commission-free platform streamlines the process of connecting with potential clients, and our blog provides invaluable tips and tricks for essential aspects of freelancing like pricing your services, increasing your rates, writing proposals, and scheduling services. Looking for friends? Contra’s Slack community fosters collaboration and networking with like-minded individuals.

How to Invoice: A Beginner’s Guide 💰📬 by The Contrarian

As a freelancer, getting paid is a must. But not everyone knows how to invoice. Here’s how to create invoices with ease.
Contra Tips
We're here to help. 👋
Need some help? You've come to the right place. Here, you'll learn more about Contra and how we can help you with your journey.

Related articles

Start your
independent journey

Get started

Hire top

Hire now