Invoicing: here’s what you need to know
Invoices
An invoice is by far the most important document for your business. On the one hand, it can serve as proof that you’ve delivered a service or product, on the other hand it ensures that you get paid for it. Although an invoice in itself offers no guarantee in that area. Did you know that 1 in 10 invoices is paid late? Or that businesses lose 2.6% of total yearly revenue on unpaid invoices alone?
This, in turn, can cause serious financial problems. Because money that your business doesn’t receive on time, is money that you obviously can’t spend (or invest) yourself. That’s why we wrote this handy guide. To help you draw up the perfect invoice, and to show you exactly what invoicing is all about.
What is an invoice?
An invoice is an overview of goods or services you delivered and their price. An invoice obliges a buyer to pay, and therefore serves as a demand for payment (the amount a customer owes to a company for goods or services delivered). To be legally valid, an invoice should meet certain conditions - you’ll read all about that in the section Content of an invoice.
In short, an invoice is a written confirmation of the agreement between a provider and a buyer, listing goods or services and their price.
Invoicing, in turn, is a collective term for the process of creating and sending out invoices for work you completed. For businesses, this entails both outgoing invoices (invoices you send to customers) and incoming invoices (invoices you receive from suppliers).
An invoice is required for VAT purposes under EU rules in:
- most Business-to-Business (B2B) supplies
- certain* Business-to-Consumer (B2C) transactions
*Businesses must issue an invoice when they supply goods to a non-taxable person (generally a private individual) in case of distance selling when taxable in another EU country (Source: Article 33, VAT Directive).
Why are invoices important?
Invoices are important for various reasons:
- Your bookkeeping system, as they help track your sales transactions
- Your sales process, as they indicate how much money you make
- Legal purposes, as they serve as proof for an agreement with your customer. An invoice also invites your debtor to pay.
- Important supporting documents in case of payment issues, e.g. overdue invoices or missing invoices. You can follow up with formal actions, such as payment reminders by e-mail or using a third party to collect the debt.
- Fiscal purposes, to help draw up your VAT declaration and to allow a right to deduct VAT.
Purpose of an invoice
1. Get paid for your work
For each invoice you send you’ll receive money, helping you keep your business up and running.
2. Know your numbers down to the smallest detail
Keep track of your inbound and outbound invoices in one system to know exactly how much you earn and spend. This also drastically simplifies your tax return.
3. Be transparent about the products and services you charge for
Give a clear overview of your services and products, allowing your customer to know exactly what they pay for. This will also save you time and helps to avoid misunderstandings.
4. Brand your business
An invoice is the perfect way to build the image of your company. Stand out by adding your logo, important business information and a link to your social media channels.
Content of an invoice
Components
Generally speaking, an invoice consists of three sections:
- The invoice header
- Invoice lines
- The invoice summary
The header contains required elements such as your address. (The other mandatory elements are listed below.) The invoice lines contain the goods and/or services you provided, including their price. The invoice summary contains:
- The net amount (excl. VAT)
- The VAT rate and amount
- The total amount
- The payment terms
- Payment options
Mandatory elements of an invoice
Invoices can be drawn up in different ways. However, each invoice must contain a series of elements in order to be legally valid:
- The word ‘invoice’ should be mentioned clearly on top
- A date and serial number: use a different number for each invoice
- The full address of both parties
- Payment information: your bank account number or PayPal information
- Your VAT number (or business number)
- The delivery date
- A description of the nature and quantity of goods and/or services so your customers know exactly what they pay for:
1. The different components of a project or products and the unit price for each component
2. Your hourly rate and the time you spend on each part of a project - The VAT rate and amount
- The amount due excluding VAT
Terms and conditions
Many businesses choose to include their terms and conditions on the back of an invoice. This is not a legal obligation. In fact, attaching your general terms and conditions to the invoice will in most cases lead to discussion. Both consumers and professional customers can state that they should have been able to go through these terms and conditions earlier and that, consequently, they do not apply.
That is why you should always communicate your terms on your quotation (before the product/service has been delivered). For B2B transactions, referring to the terms and conditions on your website will also suffice. This does not apply to B2C transactions: here, you will need to add your terms and conditions to your quotation.
Note: it’s always a good idea to once again mention your terms and conditions on your invoice, but make sure the content corresponds with the terms and conditions in your initial quotation. This will help avoid any unclarities and debate as to which terms apply to that specific transaction.
Different types of invoices
Standard invoice
A basic format for an invoice that includes all the basic information and can be used for different business transactions by multiple industries.
Use: very common
Commercial invoice
Special invoice designed for foreign trade such as a shipment of goods from one country to the other. It contains contact details of the seller and buyer, items sold, cost of items and tax payable. It also has special attributes such as carrier identification number, country of origin, harmonised code for each items and a declaration that the invoice is authentic.
Use: less common, for customs declaration when a product is crossing international borders
Progress invoice
Invoice sent from time to time to show the progress of a large project and quote an amount to be paid because the company has to pay the employees working for them during the works.
Use: commonly for the construction industry for works that extend over a long period and are also very expensive (e.g. constructing a house)
Timesheet
Special kind of invoice preferred by service professionals who charge based on time and typically mention time instead of product.
Use: for service-driven intellectual companies (consultancy firms) who offer services based on time
Recurring invoice
These are invoices with a fixed rate that are usually delivered at the end of each month.
Use: typically used in the rental industry (e.g. for tools, space)
Pro forma invoice, quotation, quote or estimate
Invoice that gives an idea to the buyer abouts the cost of products and services and can be typically used as a commitment by the seller to deliver certain goods or services at the estimated price. It can also be an advance payment against the estimated project amount.
Value-based billing
Billing based on the services provided to the client and the value of those services. The invoice amount depends on the amount of work delivered to the customer rather than the time it takes to complete a project.
Use: when the value of a service or product can be determined beforehand
Fixed-bid billing
Billing best suited for projects with well-defined requirements to quote a fixed price for a project.
Use: small businesses or freelancing services
Time-based billing
Billing based on an hourly rate and the amount of hours worked on a project. The golden rule of time-based billing is not to undercharge for your services.
Use: creative jobs in which you’re not sure how much time it takes to complete a project
Creating an invoice: step by step
Do you use invoicing software? Then you probably have the option to start from an existing template. This will definitely save you time when drafting your first invoice.
If you don’t use any software yet, you could also use Word or Excel - although that will take you more effort and time. Just think about following up on payment statuses, or sending payment reminders. To determine your own house style, feel free to check out Invoice templates for inspiration.
Creating invoices in Word or Excel
- Open Word or Excel and select ‘New File’ (‘File’ → ‘New’). You can start from scratch and choose your own layout, or select one of the predefined templates, i.e. ‘Invoice’ or ‘Commercial invoice’.
- Enter your company information and the products or services you provide.
- Enter your customer’s information, the invoice number, the date and possibly a subject. Make sure you don’t forget any legally required elements!
- Add the totals and check the amounts.
- Save the file, send it to your customer and save it (if applicable) in your bookkeeping software.
The benefit of Excel is that you can use formulae to calculate totals or the VAT due. If you always use the same template, you don’t need to recalculate these amounts every time.
Once your invoice has been drawn up, you can print it and send it by post, or online through e-mail.
Online invoicing
Why online invoicing? Each year, millions of invoices are sent across the globe. That means tons of paper and thousands of trees - not to mention the number of envelopes. The ecological aspect alone should be enough to make you reconsider. But there are more advantages when it comes to online invoicing software:
- You have less administration
- You get paid faster
- You save money (no more paper, envelopes, stamps)
- Invoices are available anywhere, anytime
- You can follow up on invoices more easily (and nothing is lost anymore)
- Your customer can pay online right away
E-invoicing
“Italy is the first EU member state to introduce mandatory B2B e-invoicing. Other countries such as Spain, Greece and France have been rumoured to follow soon."
Keep in mind that consumers can always refuse electronic invoicing for now. If customers prefer a paper invoice, it should not cost anything extra - businesses are not allowed to raise the price of products or services because their customer refused an electronic invoice. You could, however, offer a special discount to customers who choose electronic invoicing.
If you do decide to adopt e-invoicing, however, an important question remains: why choose an online invoicing tool over tried-and-tested tools like Word and Excel? Well: as they were not designed as invoicing tools, you’ll soon discover their downsides:
- Following up on invoices and payment reminders
- Any subsequent invoices you make and the manual work they entail
And those templates in your own house style that you created in Word or Excel? Invoicing software allows you to import those in a few clicks.
Example of an invoice
Looking for some good examples of an invoice? This website has some great examples that you can get started with right away!
Frequently asked questions about invoicing
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When is invoicing required?
Any taxable persons doing business in the EU are subject to EU-wide invoicing rules (Articles 217-240 VAT Directive) and, in certain areas, national rules set by the individual country. We recommend you check with local authorities whether more strict rules apply to your country. That said, invoices are mostly mandatory if you sell goods to taxable persons (self-employed, businesses or government institutions). Certain B2C (Business-to-consumer) transactions will also require an invoice.
When you send your invoices mostly depends on the client and type of work you do. Most commonly, invoices are sent when orders have been filled or tasks are completed. If you work on a big project, you may choose to send interim invoices for the work done to date. And if you sell subscriptions, you’ll send recurring invoices at regular intervals.
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What if your invoice is not legally valid?
To reclaim input VAT, you need a valid VAT invoice. However, tax authorities have to look beyond the wording of the invoices to the other information made available to them when considering the claim. So, even if an invoice does not include all legally required elements, tax authorities cannot refuse the claim on these grounds alone.
If you forget to mention one of the mandatory elements of an invoice, you could face an administrative fine depending on your country of residence. In general, though, invoice mistakes happen and most clients are understanding about correcting these mistakes - as long as it doesn’t get too complicated and doesn’t occur too often. Either way - it’s definitely worth your time to double-check your invoices before you send them out!
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What is the difference between a commercial and pro forma invoice?
Do you sometimes work for international customers? Chances are you’ve heard of a pro forma invoice before. Pro forma invoices can be mandatory for international transactions (depending on the country of import). A pro forma invoice closely resembles a plain invoice, but there are a number of notable differences:
- A pro forma invoice belongs to shipments for which no payment has been made, e.g. samples, spare parts, … As a result, pro forma invoices do not include a request for payment.
- A pro forma invoice should clearly state the word pro forma.
- In general, pro forma invoices are followed by an actual invoice.
As a pro forma invoice is not an actual invoice, it does not share the same evidential value. Pro forma invoices only serves as proof against the issuer and not against the recipient.
An example: you send a pro forma invoice to your customer upon request. That customer ultimately decides to go with a different supplier. In this case, you cannot take legal action due to an unpaid invoice, because the pro forma invoice has no probative value towards your customer.
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How long should invoices be kept?
Within the European Union, the VAT directive allows countries to impose their own period throughout which invoices need to be stored. This means the mandatory storage time for your invoices depends on the member state where you reside.
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In what language should invoices be created?
EU regulations state that local tax authorities may require the translation of invoices solely for tax audit purposes (and they sometimes do). There are no specific European rules on the language of invoices, so in practice any national language may be applied as far as it is understandable for your relevant target audience.
One quite popular solution is to have bilingual invoices: drafted in the local language and in English. If you choose to communicate to consumers in a certain language, you have to apply it consistently. If, for example, your website is in French just like your general terms and conditions, a consumer can demand an invoice in French.
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Why do invoices remain unpaid?
Unpaid invoices can have several causes. Your customer may be unhappy about your product or service, your invoice may be unclear - or inaccurate. An inaccurate invoice obviously leaves a poor, unprofessional impression. If you draw up invoices manually without using an online invoicing tool, your best bet is to double check everything before you send it out.
You should also pay attention to these matters:
- Don’t wait a week before drawing up your invoice. The sooner your customer receives your invoice, the sooner you can receive payment.
- Send a payment reminder as soon as the payment term has expired.
- If possible, check the creditworthiness or financial health of your customer, e.g. by using credit evaluation tools.
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What to do with unpaid invoices?
The general rule for invoices is: you must always protest an invoice within reasonable time upon receipt. In practice, the sooner you do this, the better. Try to respond within a week at the latest, although this period is not ‘absolute’: the court itself decides, depending on the circumstances, what that period is.
After all, whether the period in which you respond is reasonable also depends on what exactly you are protesting. The more complex an invoice and the more inspection it requires, the longer you have to respond. Even if your invoice was delivered late by your supplier or if you can prove that you were travelling or had to ask additional questions first for instance, you’ll have more time to protest.
Keep in mind that a supplier’s general terms and conditions or contract may contain a specific period in which you must protest. You need to abide by these terms and conditions. If this period is not excessively short, there’s an actual chance the court will find that both parties are bound by it, unless your customer had a good reason to respond to it later.
Disclaimer
The information contained in this page is provided for informational purposes only, and should not be construed as legal, fiscal or financial advice. Bear in mind that invoicing legislation is subject to change and may be different in your country of residence.