How Do Invoices Work?

By Danica Djokic

June 17, 2023

If you run a small business and you want to get compensated for the goods and services you provide, you can’t afford not to invoice your clients. Drawing up invoices may not be the most exciting thing on your to-do list, but it’s an essential part of running a successful company. 

So how do invoices work? It’s important to note that invoicing doesn’t have to be a tedious task. Our guide will walk you through the entire process.

What is an invoice?

Before we delve deeper into the invoicing process, we have to explain what invoices are. In short, companies issue an invoice to bill customers for the goods or services that they’ve purchased. It’s a payment demand that includes the total amount due, the description of all the services or goods, due date, and payment terms. Of course, you’ll also have to include things like your name, address, and contact details.

What is an invoice used for?

While it’s true that you can turn to free online software to help you with your invoicing, it still helps to know how invoices are used. This time-stamped document informs your clients that they owe you a certain amount of money for services rendered. And although invoicing might seem complicated, there are a number of reasons why you should use invoices over purchase orders and a sales receipt.

• Generating settlements: Having all the details of the service and goods listed represents legal proof that can be used to protect the merchant from lawsuits and false allegations. 
• Payment tracking: With an invoice, you’ll be able to track and record all your sales and store them in your financial history. 
• Easy tax filing: With all your invoices recorded, reporting your company’s income is a breeze.
• Business analytics: Your invoices are a useful source of information on the buying habits of your customers and popular products, which can be helpful with your marketing strategy.

How to make an invoice?

Creating invoices and conducting payments is a no-frills job, as there are numerous brick and mortar and online bookkeeping services to help small businesses out. If you don’t have anyone to lean on, then make your own invoice – it’s a breeze.

There aren’t any standardized forms that you have to use when making an invoice, which can be advantageous and confusing at the same time. If you’re trying to figure out how to write an invoice, the first thing you should do is map out the format. 

The earliest records of transactions date back to 5000 BC, when invoices were carved on stone tablets or clay. But we’ve come a long way since then, and today’s invoices are typed out on paper and delivered by electronic or traditional mail. 

As such, invoicing procedures have never been more accessible and eco-friendly with paperless invoices sent through email and paid online. Regardless of which method you use, make sure to include the following components in your invoice:

• The word “Invoice” and the company’s logo at the top
• An invoice number
• Your personal details (name, address, phone number)
• The client’s personal details
• The date of service rendered
• Description of products/services 
• Amount due 
• Payment due date 
• Payment terms (late fees, discounts)

You can simplify the invoicing process by either using an online platform or choosing an invoice template. Simply choose a free template that’s most suitable for your business and create an invoice.

How do invoices work?

Now that you know what an invoice is and how to create one, you’re all set for the next part. Here are the steps you should follow:

1. Agree on the purchase with your customer. Set the price, potential discounts, additional taxes, and discuss them in detail. Agree on all the terms, elements of the invoice, and get the personal details of all the parties involved. 
2. Set the due date. Keep in mind that you can discuss the due date and offer discounts for early payments. Also, you may allow big players to pay at a later date; in this case, you would issue credit terms without charging the interest. Having an invoice addressed to a megacorp isn’t a guarantee. Make sure to check the company’s credit rating to avoid any regrets down the road. Payment due dates are usually set to 15, 30, or 60 days.
3. Now it’s time for some magic: create an invoice using our tips. Remember, it can be handwritten or typed and sent electronically or using the traditional mail service. If you’re still not sure how to create an invoice, do not hesitate to Google free printable invoice templates and use them, or use a free software that’ll do it instead of you. 
4. We’ve answered your question, how does an invoice work? Now, it’s time to send it to your customer. When it comes to timing, invoicing on the spot works best if you’re doing small, one-off jobs. If you’re conducting a large-scale job, we recommend sending the invoice within 48 hours upon completing the work. For recurring services, the best option is to send a monthly invoice which is an administrative win-win. 
5. Once your customer receives the invoice, the clock starts ticking. Now it’s only fair to ask yourself: how do payments work in case the client shirks his duty? Well, there are options for dealing with this situation. You can start a legal dispute, report your unreliable customer to the Business Reporting Bureau, or factor the unpaid invoices. While factoring might be the last resort, some businesses tend to employ the services of invoice factoring companies. 

A finalized invoice is the one that has been paid in full by the customer on time. All completed invoices should be reconciled to make sure that you recorded the correct balance within your account. And don’t forget to check the payment terms beforehand every time you want to close a deal.

How do PayPal invoices work?

Those of you who have been wondering if it’s possible to invoice customers via PayPal can set their minds at ease. Not only is it possible, but it’s also free and easy.

You can find the PayPal invoice tool on your account section, and from there, you can choose one of its invoice templates, customize them if you wish, or create your own. PayPal will email your customer a link to the invoice and even translate it if you’re sending it internationally.

Your customer can pay via PayPal, PayPal credit, or with a credit or debit card. Plus, you get the option to manage your invoices.

How do eBay invoices work?

This option might seem like a can of worms, but it’s not. We’ll dumb it down. With eBay, users usually pay via eBay checkout. Alternatively, you can get your money by sending an invoice from either My eBay or Seller Hub tabs. 

There you’ll find the simple invoice template that you can revise or simply add payment details to. Under the eBay invoice tab, you can also check the summary of your monthly sales, which can help your business analytics.