Invoicing is a crucial practice in every business. How, when, and even if you’ll get paid often depends on the invoicing process.
If you manage a small business, you’re undoubtedly aware of the importance of steady revenue and cash flow. To have control over it, you should master the different types of invoices.
Every type of invoice has its purpose and place in the billing process. In this article, we’ll take a look at eight types of invoices, and explain how and when to use them for maximum efficiency. Let’s start!
Pro Forma Invoice
Whether you bake cookies, manage social media accounts or change truck tires, your customers will likely want to know how much your service costs.
That’s where the pro forma invoice comes in.
This type of invoice typically lists the goods and services you provide, along with the price for each, and serves as a preliminary estimate of the cost the buyer is supposed to cover if he or she decides to follow through with the purchase.
However, even though a pro forma invoice is merely an estimate, that doesn’t mean that your numbers should be haphazard.
In most cases, a pro forma invoice is precise and provides the customer with a price close to the final figure. That way, the buyer can make an informed decision on whether to buy the goods.
Furthermore, this type of invoice usually includes customs and import fees, which is especially useful if you’re doing business internationally.
However, it’s important to keep in mind that a pro forma invoiceisn’t a request for payment like most other types of invoices; it’s simply a way for a small business and a customer to agree on the price.
In the example below, you can see what a pro forma invoice can look like.
As you can see, this one has all the standard elements of an invoice.
- company and customer details
- invoice number,
- description and price of the services
- total amount due
- payment terms
However, according to Investopedia, there’s no standard format or guidelines when it comes to the presentation of pro forma invoices, which means you have a lot of freedom in how you design them.
Nevertheless, the price and description of what you offer are crucial and you shouldn’t omit them.
Next, once you and your customer agree on the price with the help of a pro forma invoice, your attention should shift to other types of invoices. One of them is the interim invoice.
An interim invoice is the type of invoice that you are likely to often use if you’re doing bigger projects that span a large period of time.
Suppose your business is handling some time-intensive project for a customer.
In that case, you have two options for billing—you can send one invoice at the end of the project with a lump sum that covers all the work you’ve done, or you can send interim invoices after completing a part of the work.
For example, if your business is doing accounting for another firm and you know the project will last 12 months, you can send an interim invoice for an agreed amount every month. That way, you can count on certain revenue from that client every month.
That means that interim invoices can help manage your cash flow, which is especially helpful for small businesses. If you know when you’ll get paid, it’s easier to plan and cover your expenses.
One more benefit of this type of invoice is lower risk for you as a service provider. For example, if your customer pays on time every month, that’s a good sign that you’ll be fully compensated for your work.
On the other hand, if you constantly receive late payments on interim invoices, you can take the necessary steps to handle whatever the problem might be before it escalates.
There are benefits for your clients, too. Interim invoices provide them with financial flexibility and ensure that you’re doing the agreed work.
Interim invoice is not the only type of invoice that’s used for billing your customers after a certain period of time. In the next section, we’ll discuss another one.
A recurring invoice is a type of invoice that you can use for charging clients periodically for the same amount, according to Adobe.
If you think that sounds similar to the interim invoice we examined in the previous chapter, you’re right.
However, there’s a key difference between the two types.
The difference comes down to how rigid the arrangement’s ending date is, as you can see in the image below.
In other words, you use interim invoices to charge your clients on a regular basis for a project that is set to last for a predetermined period of time, while recurring invoices are used in projects that are ongoing, with no set ending date.
For example, all of us who like to indulge in a Netflix binge are customers of a company that uses recurring invoicing for its services.
Similarly, if you then go to the gym to get in shape after all that binging, you’ll be dealing with another type of business that mainly uses recurring billing.
You don’t have to be a corporate giant to use recurring invoices. Even if you don’t rely on a subscription-based model or a membership program in your business, you probably have some long-term projects with your customers that don’t have a set end date.
For instance, if you manage a client’s social media accounts, you can use recurring invoices to bill them every month.
That type of invoice usually contains the same information about the product or service, and the same amount of money required, and it’s sent on a regular basis. Because of that, you can simplify recurring invoicing by using automated billing software.
For example, with Regpack, you can create, personalize, manage and schedule recurring invoices for your customers. You can also receive notifications if the payment is late, and schedule reminder emails to follow up.
The recurring billing software is a great fit for any type of small business. Combining it with recurring invoices, as we’ve discussed in this section will save you a lot of time and resources.
Sometimes you may charge your customers less than you were supposed to; maybe you worked additional hours for them, which wasn’t reflected in the original invoice, or you put the wrong tax amount in.
Whatever it might be, a debit invoice is here for those situations, helping you make sure you’ll get the money you’re owed.
A debit invoice, also known as a debit memo, is essentially a modification of the previously issued invoice.
For example, if you have an agency that manages customers’ websites, you may end up spending five hours more on the recent redesign than you anticipated.
In situations like that, debit invoices come in handy, especially for small businesses.
Below is an example of a debit invoice. Notice how it has a reference invoice number and date, so it’s easy for the customer to know which invoice you’re adjusting with this debit memo.
These invoices are crucial for bookkeeping; they constitute the written trail for any auditing purposes or disputes that may arise in the future.
That also stands for one more type of memo that shouldn’t be confused with a debit memo; a credit memo.
Known also as a credit invoice, it’s an adjustment of an existing invoice as well, but you issue it when the customer paid more than she should.
That can happen in situations when you didn’t deliver your work or parts of it, there was a product return, or even if you forgot to include a discount in your invoice.
If you’re guilty of the last one, Regpack can make your life easier. You can easily set up automatic discounts or add them manually, and it offers flexible options for many situations.
Sometimes, you’ll find yourself needing to adjust the invoices you’ve issued, no matter how careful you are. Remember that you have debit invoices at your disposal for just that type of situation.
A collective invoice is a type of invoice that you would use if you had several smaller charges for your customer.
The main benefit of a collective invoice is simplifying the invoicing process.
You can group smaller goods and services in that type of invoice and bill them all at once.
For example, if you provide IT maintenance services for your customer for two hours every week, you can send a collective invoice once a month instead of a regular one once a week.
You can also group different items or services on a collective invoice.
For instance, below is an example of a collective invoice for a restaurant; the delivery service combined 12 different suppliers, five different dates, and four categories of products on one invoice.
Of course, there’s always the option of using regular invoices for every single thing you do for your customers; every extra hour of work, every item you sell them twice a week, everything.
However, that means more time and money spent on invoicing and managing payments, as well as more transaction fees for you and your customer. It’s inefficient, tedious and unnecessary.
Like most other types of invoices, a collective invoice should contain all the necessary information we’ve already mentioned in this article.
You should especially keep in mind that it should also include both individual costs of every service or item and the sum of all charges.
A collective invoice can be a time and money saver, both for you and your customers.
Let’s face it, the invoicing process is not a favorite business procedure for most people, so if there’s a way to make it less complicated, you should take it.
Past Due Invoice
Sometimes, the dreaded thing for every small business happens—the due date has passed, and your customer still hasn’t paid that invoice you sent.
When that happens, it’s time to send a past due invoice.
Late payments are a considerable problem for small businesses; according to the Brodmin analysis, around 10% of small businesses receive late payments.
That’s why you should send past due invoices; steady revenue is bread and butter for every small business, and that type of invoice can make a difference between getting paid and losing money.
The purpose of a past due invoice is simple—to patiently and friendly remind your customers that they’re late with the payment and provide them with all the information they might need.
Also, that type of invoice can include any additional late fees or interests.
You can include that if you have clear payment terms in the invoice; for example, you have no evidence that the customer is even late with the payment without a due date.
Furthermore, you can include late fees if you and your customer agreed on them in a contract or other business agreement.
If those criteria are met, extra charges for not paying on time should be listed on the past due invoice in the form of an amount or percentage of the overdue amount, like in the example above.
In dealing with late payments, a solution like Regpack can be helpful.
Among other features, you can schedule payment reminders for every customer, collate data on customers to filter out those who are often late with payments, or easily automate sending past due invoices.
However you approach late payments, past due invoices can be a useful tool in collecting your rightfully earned revenue.
A commercial invoice is used when you do your business internationally. Because of that, it has some specific parts that other types of invoices don’t have.
Since it’s used in international business, the important part of that invoice is to list and describe goods and services, or, in other words, include the value and other details needed to determine customs and taxes.
According to Skynova, there isn’t a standard format for commercial invoices that you should follow; however, you should include specific information so that everything goes smoothly.
Keep in mind that, besides the information listed above, a commercial invoice should also include all the standard information that the other types of invoices have.
To refresh your memory, that includes seller and client details, invoice date and number, the total amount due and payment terms.
You can see what the commercial invoice looks like in the example below.
As a provider of goods and services, it’s important that you accurately fill your commercial invoices. According to icontainers, failing to do so can result in lengthy hold-ups and shipping delays, all of which cost you money.
For small businesses, additional costs can be a significant problem, so it’s best to avoid them by ensuring that everything is by the book regarding the commercial invoices.
Whether you do your business locally or internationally, offer IT services, groom dogs or lay bricks, one particular type of invoice is always important—a final invoice. In the next section, we’ll explore what it is and why it’s essential.
As the name suggests, you send the final invoice to your customers when everything is completed, and your job for them is wrapped.
The final invoice should list everything you’ve done in the process of working for your client, as well as the total cost, due date, payment terms, and every other essential element of an invoice we already mentioned in the previous sections.
Also, if you used interim or recurring invoices during the project, the final invoice can include any payments you received that way.
Below you can see an example of a final invoice, with all the standard elements it should include.
In addition to the aforementioned essential elements, the example above also has an “advanced payment” amount.
That’s one more thing you should keep in mind—if your customer paid you a certain amount of money upfront, you should also include it in the final invoice as a deduction from the total due.
It’s up to you when you’ll send your final invoice. For example, you can send it immediately after completing the work, thus ensuring that the client pays as soon as possible.
On the other hand, you can send it in regular intervals; for example, every first of the month, or when you know your customers regularly make their payments.
Automation software like Regpack can be very useful for small businesses if they choose the latter option. For example, instead of manually typing and sending final invoices to customers every month on the 1st and 15th, you can set the software to do that.
A final invoice represents the conclusion of your business with a customer. Be sure that you sum everything up, include all the necessary elements, list your services and leave nothing to chance.
The type of invoice you use in a particular business arrangement can influence many factors.
And it makes sense—it’s not the same if you use interim invoices instead of just one final invoice. Your administrative challenges are different if you issue collective invoices. Your cash flow may depend on properly using past due invoices. And so on.
Small businesses can greatly benefit from mastering the different types of invoices, as well as can hurt from not using them. Use the advice from this article and you’ll be in the first camp.