Most people who have anything to do with business and commerce know what an invoice is. It’s the document that itemizes a commercial transaction between two entities. Other popular terms for invoices are “bills” and “purchase orders,” and a frequently used term for invoicing is “billing.” Think of all those online purchases made where the vendor asked the customer for their billing information. Proper invoicing is key to keeping a company alive.
The parties to an invoice
So what entities are involved with invoicing? Principally, it’s the vendor, merchant, contractor, or other service provider, and the customer or payer. Those entities could be two businesses, one of which made some kind of a purchase from the other. They could be a company and an individual, like an independent contractor, or between two individuals acting as sole proprietors.
In the end it doesn’t matter what “entities” are involved in a transaction, or whether they’re large, medium, or small businesses. What matters is that invoices are properly drafted by the vendor, including PO numbers and other identifying information, and that they’re properly received and paid by the customer.
Invoices are directly related to accounts payable and/or accounts receivable. Invoices received from a vendor are recorded under accounts payable, while the vendor records an equal amount under his own company’s accounts receivable. More importantly, the invoices itemize the billing amount, which helps not only with itemized accounting but with inventory control.
What items are in an invoice?
It’s a no-brainer that invoices show the number and type of goods or services sold and the amounts owed. Even still, that’s not the end of the story. There are standard types of information that every invoice needs to have if invoicing is going to be possible at all.
First, every invoice, bill, or purchase order receipt with an outstanding amount owed needs to say on the front of the document that it’s a bill or some kind of statement of debt.
Second, other information invoices require include an invoice number, or at least a reference number to a specific purchase order.
Third, other than the number of goods and the type of goods in the transaction, and the amounts owed, these bills should include an invoice date. The proper invoice date will be for the day the order was made, or day the goods and services were received, not necessarily whatever calendar day on which the vendor wrote up the bill.
Fourth, they must include a due date. That due date is often the critical red flag that lets companies know they’ll start racking up late charges or fines if payment isn’t rendered.
Fifth, they should clearly state the accepted forms of payment. Most merchants and retailers accept all major credit cards and PayPal, and a growing number even accept Bitcoin.
These are the basic items, but invoicing often also includes special items like military and veteran discounts, and special coupon codes for online purchases. Invoicing can get complicated as companies accountants not only struggle to account for discounts, late charges, credit card processing fees, etc. They also have to deal with numerous invoices from different vendors for a steady flow of goods and services. This accounting nightmare is easily avoided when using automated accounting and procurement software. Automated invoicing programs are a much lower company overhead cost than hiring multiple accountants.
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Invoice financing and getting paid
When the flow of purchases and deliveries becomes regular or even constant, it’s simply not practical for companies to render payment at the moment they receive the goods and services they bought. This is the territory where invoicing touches on accounts payable and accounts receivable. Whether through online invoicing or other more traditional invoicing methods, the transactions itemized in commercial or corporate invoices need to be financed. In plain English, the supplier needs to know that the customer is good for the money owed.
Most companies do their transactions on credit, with the terms of payment already agreed on long before with a contract. Vendors will send invoices understanding that they won’t be paid immediately, but eventually. At other times, vendors will let customers finance their not-yet-paid-for purchases through offering collateral. When Apple was failing in the early 1990s and Microsoft rescued them, Microsoft fronted millions of dollars to Apple on the understanding that if Apple couldn’t pay its invoices, then Microsoft would own part of the company.
Most companies prefer to do transactions on credit, but when it comes to credit, it’s much more preferable to receive than to give, which is why vendors won’t give to just anyone. Offering up collateral is often the best way for underdog companies to finance their large purchases before they’ve established ironclad good credibility with their suppliers.
Online invoicing is a common practice in the digital age. In small and large companies alike, the pace of business moves incredibly fast and one of the best things companies can do is to streamline their online invoicing process. Most companies and independent contractors alike to their business by electronic invoicing. They end and receive invoices online, sometimes using accounting software and sometimes just sending invoices as PDF files.
The clearest advantage of electronic invoicing is that, in case a printed invoice gets lost or a digital file is accidentally deleted, the customer can simply request another digital copy of the invoice. However, invoicing by email or other more manual methods can be quite labor intensive. Imagine a company like SpaceX hiring over one hundred independent contractors for a special project. The accountants and the people in the payroll department will both have a nightmare of the time tracking and manually entering in the data from over a hundred different invoices on a hundred different PDF files.
Large and small businesses alike strive to cut costs, save valuable manpower, and reduce the frequency of accounting errors by doing all their invoicing through accounting and procurement software. If SpaceX was to utilize one of the best accounting and procurement software, designed by Procurify, then all the sending and receiving of invoices would be automated. Instead of any one person sorting through and adding up the total accounts payable liability documented in incoming invoices, set payment reminders for unpaid professional invoices, and the software would also track and sort every invoice.
That means every individual independent contractor has a unique name or ID entry, every invoice has a unique number for purchase orders, goods and services received are already itemized, and all amounts are correctly totaled the first time. Best of all, the automated program tracks the expense types. Not only will the automated expense reports reflect how many contractors were paid, but also how much money was spent on each type of service. For example, $40,000 due to the AI coders; $122,000 due to the petroleum company that provided the fuel for rocket engines; $8,000 due to the caterer that provided food for several working lunches or all-night work sessions, etc.
Invoices are some of the most important business documents a company can have. Invoices are the documents that specify the type and amount of goods or services purchased by a company from another entity. The amount owed on that invoice translates differently but equally for both parties; for the purchaser that number is recorded in accounts payable, and for the vendor, in accounts receivable.
Invoicing is the vital practice that keeps businesses alive. It not only shows ingoing communication and trade between different companies—it keeps both parties informed of exactly what kind of commercial transaction took place, for what goods and amounts, and what the expectations are for both parties. The practice helps accountants do their jobs effectively, helps companies make payments on time and avoid late fees, and it helps companies strengthen professional relationships. Invoicing in the digital age is made worlds easier by introducing user-friendly automated procurement software into companies that are seeking growth.