Invoices are a legal necessity. They are required to keep track of business expenses, sales, customer payments, and outstanding debts. Invoices provide a record of business expenses that can grant legitimacy to claims presented to arbitration panels and courts and help track flow goods through a chain of buyers and sellers.
An invoice should definitely include the following:
- Name and, if applicable, brand or symbol of the issuing business entity.
- Relevant business identification such as EIN or VAT numbers.
- Business address and other contact info such as phone numbers and emails.
- Date of invoice generation and invoice tracking number and purchase order.
- Name and other identifying information of customer or intended invoice recipient.
- Line item organization that specifies nature and amount of each product or service that requires compensation. Example: “parts” and “labor” of mechanic shops.
- If applicable, deductions for payments already received and any discounts specified in the invoice.
- Total invoice charge, net deductions or discounts.
- Acceptable payment methods and payment due date.
- If applicable, potential fees or interest on balance outstanding past due date.
- If invoice is in regards to late fees or interest on outstanding balances, include all applicable expenses.
Legal Importance of Line Item Categorization
Line items in an invoice should be categorized as being either sale concrete goods or intangible services. Variations on this wording include the common “parts” and “labor” components of auto and home repair bills.This distinction lets the customers see what exactly they are paying for while also allowing a business person to keep track of expense types. This distinction is especially important during tax time.
Unpaid invoices that detail sale of material goods allow for the unpaid sale price to be deducted from taxable income, reducing overall tax burden. However, business-related expertise, time or services that were not compensated are not deductible as business expenses. An example should illustrate the difference:
SellStuff, Inc. buys scrap metal, refines and sells the purified products to a buyer in exchange for the buyer’s promise to pay $100,000. The buyer is unwilling or unable to pay. SellStuff, Inc. can deduct $100,000 from gross revenues, thereby lowering its tax burden.
SellServices, Inc. offers consulting services, and makes a deal to help a client make optimal use of scrap metal in exchange for the client’s promise to pay $100,000. Note that SellServices, Inc. does not sell any metal or any other tangible good; it only offers their time and expertise. The client does not pay. SellServices, Inc. is unable to write off the promised $100,000 or any opportunity cost of spending time with the client, agreed-upon billable hourly rate, nor any fraction of training or education it took to advertise or otherwise convince the client to hire them.
Further Reading: US Invoicing:
What are the requirements, criteria, or format of a commercial invoice, bill of sale, and receipt that must be provided when clearing or filing entry documents with U.S. Customs and Border Protection?
Several variations on a standard invoice make business operations and record keeping much easier. When negotiating a business agreement, one party will usually introduce a proposed invoice. This is the client’s first introduction to the entrepreneur’s terms and compensation requirements.
A proposed invoice spells out likely costs for various line items as well as discounts or late fees that an entrepreneur may have in mind. The proposed invoice can be amended many times before final agreement and start of work. Make sure to get written confirmation and a signature from the prospective invoice recipient that outlines the agreement to all invoice terms.
If a project or assignment is lengthy, multifaceted, or otherwise difficult to itemize in one invoice, interim invoices are great organizational tools that help clarify expenses, payments, and deliverables.
Interim invoices estimate ongoing costs that will be required for project completion. Upon completion, the final invoice will take into account any over or under-payment by the client and credit them accordingly.
Final invoices include all expenses for products, services, labor and other compensation expected and outlined in a proposed invoice or other agreement. Total expenses should take line item expenses into account as well as deductions for any interim or estimated payments sent by the client prior to completion.
Failure to pay a legitimate invoice in full by the due date can trigger additional fees or interest pertaining to an outstanding balance. These fees or interest can be summarized and communicated to a client with an interest invoice. Interest invoices reference the unpaid amount, applicable rate, rate and next payment due date.
Note that interest or late fee invoices should not come as a surprise. A client should be aware of, and agree to, potential interest and late fee charges upon negotiating the proposed invoice and other documentation pertaining to a business deal. If a dispute about incomplete payment comes to arbitration or court, interest invoices may be decided to be invalid if their stated terms were not referenced earlier in the proposed invoice.
Further Reading: UK Invoicing:
Resolving Outstanding Payment
Some customers will be unable or unwilling to pay their bills. If a business is not willing to let the issue slide, it has several choices in how to pursue the outstanding funds. A reliable option involves small-claims court if the amount is below the state-designated limit for small claims courts. Typically, non-payment of, on average, $10,000 or less can be handled in small-claims courts. Arbitration or civil court can settle larger disputes. An outstanding balance can also be sent to a collections agency, with the agency taking either a flat fee or percent of collected amount in exchange for their help.
The strength of invoices in legal disputes rests on the clarity of payment terms, all applicable due dates and timelines, justifiable amounts, and organized line items. A bill that is haphazard or ambiguous will not go far with customers nor with courts.
On the other hand, a well-crafted invoice communicates professionalism, reliability, and confidence in the product or service an entrepreneur is selling. Though invoice prep services are abound and various invoice software tools, FreshBooks is especially convenient and intuitive when it comes to putting invoices together.