Businesses create many different types of invoices for their clients every day, and the type they use depends on the industry of the business and how they bill their clients. Different types of invoices can give clients flexible payment options, and each of them has a specific purpose.
With so many options available, you should know which type of invoice to send and when. For example, a business shipping goods to a different country needs to issue a commercial invoice that includes information about the goods and their value. A photographer, on the other hand, won’t need a commercial invoice for day-to-day invoicing, and they will likely use a standard invoice.
Learn more about why proper invoicing is critical for your business’s cash flow, what elements must be included in an invoice, and the different types you can use.
The Importance of Invoicing for Cash Flow
There is more than just one type of invoice used in business. Understanding which invoices to use and when is critical to getting paid on time and maintaining a healthy cash flow.
Cash flow issues are one of the main reasons small businesses fail. In fact, the control of cash is one of the most critical considerations for a business’s financial stability and security.
Proper invoicing has as much of a direct influence on a healthy cash flow as incorrect details, so choose the right type of invoice to avoid invoicing mistakes and late payments.
5 Common Types of Invoices
Because there are different demands for businesses in specific industries—and also for the various services and products they provide—several different invoice types are used accordingly.
A standard invoice is the most common invoice type and is issued by a business to a client. It uses a flexible format that fits most industries and billing cycles. Standard invoices usually include basic information, such as:
- The business’s name and contact details
- The client’s name and contact details
- A unique invoice number
- The items purchased
- The total amount of money owed by the client
Commercial invoices, also referred to as business invoices, are issued by businesses for goods provided internationally. Part of the required documentation for foreign trade, these invoices include details of the products and the sale so that customs duties can be determined for cross-border sales.
The information included on commercial invoices includes the:
- Shipment quantity
- Description of the goods
- Volume or weight
- Packaging format
- Country of origin
- Carrier identification number (sometimes called an air waybill number)
- Total value
The commercial invoice may also contain a declaration that the invoice is original, details of the person in charge of the transaction, and special comments or notes.
Timesheet invoices are often used by professionals who render services based on time. These invoices are ideal for businesses that invoice clients based on the number of hours they worked on a project. They’re also a good fit for contract employees who are paid hourly by the employer. Technical writers, psychologists, freelance journalists, and therapists are professionals who might use a timesheet invoice.
Also known as a credit memo, a credit invoice is a record of an amendment to an original invoice. It is used to confirm that a business owes the client (or buyer) money. This is used when:
- A business doesn’t deliver the goods and services indicated on an invoice.
- The client receives damaged goods.
- There is an error in the pricing.
- The client returns products.
A credit invoice will always have a negative total to cancel or reverse the incorrect invoice. As an example, if a business owes a client a $200 refund, the credit invoice will have a total of -$200.
A debit invoice (or debit memo) is used when you want to increase the total charge to the client. Businesses can issue these invoices when they have underbilled a client and need to correct the total.
Say a consultant ends up spending more time on a project than previously recorded on the original invoice. She can send a debit invoice for the additional hours to the company that hired her.
Both credit and debit invoices can be used to make corrections or adjustments for bookkeeping and accounting purposes.
Different Stages of Invoicing
There are different stages in the invoicing process, and although each type of invoice has its own process, they all contain the same type of information. To better manage your business’s cash flow, it’s important to ensure that your invoice process runs smoothly and that clients are invoiced on time.
Pro Forma Invoice
Pro forma invoices are typically issued when delivering services or products. However, in some situations, a client wants to know what to expect from a purchase before they commit. This is also where a pro forma invoice comes in. It’s often the first step in the invoicing process.
Businesses issue pro forma invoices to clients before work is finished. It outlines the payment as a standard invoice would, but it isn’t seen as an official demand for payment. Rather, it serves as an estimate of the sale, allowing the client to get an idea of how much the services or products will total.
Because a pro forma invoice is seen as an estimate and is subject to change, it isn’t recorded in the accounts receivable.
An interim invoice breaks down the total cost of a bigger project into smaller payments. Businesses will typically send several small interim invoices as the project progresses (often at agreed milestones), as opposed to sending one invoice after the project is completed.
Interim invoices help to maintain a business’s cash flow during long projects and can also benefit clients by allowing them to make smaller, manageable payments.
Final invoices are sent as the official request for payment after a completed project, product, or service. If no long-term projects or interim invoices are required, this is the type of invoice to use. For most businesses, this is seen as their standard invoice.
Past Due Invoice
When a customer does not pay the final invoice by the due date, a business can send a past due invoice. This reminds a customer that their payment due date has passed. All the information on the final invoice should be included on the past due invoice, along with any late fees or interest.
Recurring invoices are used to bill customers for an ongoing project or service. You typically charge the same amount at specific intervals, similar to that of a utility bill. Recurring invoices work very well for subscription-based services or if your clients have memberships with your business. For example, if you own a gym, you could use recurring invoices to bill your members every month.
Unlike interim invoices, which cease once a long-term project is over, a recurring invoice has no set end date. You’ll keep charging recurring invoices until your client or customer decides to cancel the relevant subscription or service.
Although an account statement is not technically the same as an invoice, it is very similar. Account statements are issued to clients and offer a detailed summary of the goods purchased or the services rendered. They also include payments made and any amounts that are still outstanding.
Similar to bank statements, account statements contain a summary of all transactions between a client and a business.
Essential Parts of an Invoice
These essential parts of an invoice should always be included, regardless of the type of invoice used:
- Client’s name and contact information
- Business’s name and contact information
- The word “invoice”
- Billing and due dates
- Products or services provided
- Invoice number
- Extra taxes and fees
- Cost per unit
- Payment terms
- Total amount owed
Invoicing Is a Critical Job
Knowing the differences between the various invoice types is crucial to billing your clients correctly, so prioritize this part of your job. Whether you run a small business or work as an independent contractor, get the necessary tools to handle your invoicing or hire someone to do it on your behalf.
The invoicing process is especially critical for sole proprietors and small-business owners. Creating and sending out invoices on time will allow your business to have adequate cash flow and ensure that you are paid on time.
- Business owners may choose from several different invoice types depending on the industry of the business and how they bill their clients.
- A standard invoice is the most common type of invoice issued to bill clients.
- Essential details required on every type of invoice include the business’s details, client’s details, due date, invoice number, and payment terms.
- Understanding the different types of invoices and how to invoice your clients properly is a vital part of running a business.