What Is the Purpose of an Invoice? | Invoicing Tips for Small Business
The primary purpose of an invoice is to provide a business and its client with a record of sale. An invoice serves an important purpose in small business accounting: invoices demonstrate a client’s obligation to pay you for your services. An invoice offers verification, in writing, of the payment agreement between your business and its client. Invoices set your payment terms and enable you to get paid faster for your services.
To learn how to create invoices and get paid faster, check out this step-by-step guide to invoicing for small businesses.
These topics will help you better understand the purpose of an invoice for small business accounting:
What Is the Purpose of an Invoice?
The most basic purpose of an invoice is to offer a record of sale so a business can get paid by its clients. But invoices serve other important purposes, some of which might not be immediately obvious. The following are the key purposes invoices serve:
Invoices make a record of all your sales and so are helpful for bookkeeping purposes. Invoices provide documentation of your business’s financial history. They track all the revenue coming into your business through sales and can help you gauge your profits and cash flow.
2. Tax Records
Your sales invoices provide documentation that helps to confirm the information you list on your tax filings each year. The IRS recommends that all small business owners should keep daily records summarizing their business transactions, including invoices. Visit their website for further details of the recordkeeping recommendations provided by the IRS.
3. Legal Protection
Invoices help protect small businesses from false lawsuits, because invoices provide details of the services you provide to your clients and the timeline of when you complete the work. An invoice also provides a record of the amount a client agreed to pay you for your services and signed invoices can serve as legally binding agreements.
Records of your invoices can help you develop strategies for marketing your business. You can analyze your invoices to identify peak times when your services are most in demand, the most popular and least popular services you offer and other trends in your business. Once you identify these trends, you can develop smart marketing strategies based on the data to grow your business.
5. Tracking Inventory
If your business keeps inventory, sales invoices can help you track how much inventory you have and predict how much you’ll need in the future, based on past sales. There’s software you can use to automatically track inventory based on your invoices, or you can develop a manual tracking system of your own.
What Is an Invoice Used For?
An invoice is used for creating a sales agreement between a business and a client. For small businesses, invoices are used to get paid on time for the services they provide, by giving clients a document that outlines the amount owed, the payment terms, the invoice due date and an itemized listing of the services rendered.
Professional invoices help businesses get paid faster for their services.
Why Do You Need an Invoice?
Businesses need to create invoices to ensure they get paid by their clients. Invoices serve as legally enforceable agreements between a business and its clients, as they provide documentation of services rendered and payment owed.
Invoices also help businesses track their sales and manage their finances. Invoices provide valuable data regarding how your sales change over time and can help you create accurate business forecasts. Invoices can also help you determine the average amount of time it takes you to receive payment from your clients, which can help you manage your cash flow.
What’s the Difference Between an Invoice and a Purchase Order?
An invoice is a document that a business sends to its clients to request payment for services rendered. Business owners typically create invoices after a project has been completed, to provide a record of the work and request payment.
A purchase order is different from an invoice: a purchase order is a document used by a buyer to request goods or services from a business. Purchase orders are created before an invoice is issued and they define the terms of a future sale.