5 July 2020

How important is an Invoice and why?

In this post with guest content provided by Kevin Artlett FCICM ACII, Director of specialist credit management advisory, Pecunia, we explore the importance of your Invoice and how getting it right can make all the difference getting paid.

“The Invoice is probably the most important document you produce for your business. The word itself is derived from the 16th century French word ‘envoi’, which means a ‘sending’ or dispatch, and is defined as a “written account of the particulars and prices of merchandise shipped or sent” (Online Etymology Dictionary). As well as the mandatory requirements of an invoice, the purpose and functions of an invoice should never be underestimated, and it is vital to get this right every time. What’s more is that you can use the invoice to your advantage in encouraging the customer to pay you promptly.

The essential elements are that invoices need to contain the word ‘Invoice’, they must be sequentially numbered (i.e. each invoice has to have a unique identification number), contain the name and address of the customer and the seller, list the supply date of the goods or services, show the price of each item and clearly identify any additional charges such as insurance. If applicable, your company registration number (for limited companies) and VAT number must also be included, and the VAT element must be shown against the price where applicable. The invoice is a legal document – you can take legal action to recover an unpaid invoice but not on an unpaid statement of account.

An invoice is a culturally acceptable way of asking for money; the same document has two different meanings for each of the parties. For the seller, it is the ‘sales invoice’ and for the buyer it is the ‘purchase invoice’. In certain cases, it can be a demand for payment and actually becomes a document of title when it is paid in full.

The purpose of a sales invoice is to provide a record of the sale, the date it took place and the value of the transaction. It communicates the requirement to pay for goods. The objective of sending an invoice is to tell the customer the amount which is payable and when and where to make it. Therefore, it is vital that you include the due date, your bank details and your telephone number or email address for the customer to contact you in the event of a query. Furthermore, the invoice documents the transaction as an accounts receivable entry in the accounting system until it has been paid.

The invoice must immediately capture the attention of the buyer and should enable the customer to make payment within terms without the need to contact the billing/credit control/customer service departments. Most importantly, the invoice acts as the window into your organisation and is often the basis or catalyst for the first and main contact between the buyer and the seller after the invoice has been sent and received. Therefore, the content and design should not be treated lightly.

Research shows that 60% of calls made by buyers after receiving an invoice can be narrowed down to two main issues:

  1. “The invoice is not correct…” (and can cover a whole range of actual reasons why)
  2. “How do I pay it?”

There is a balance required between the utilitarian style and attractiveness, but both are equally important. You will need the invoice to contain all the mandatory, useful and relevant information to make it practical, functional and serviceable. However, a ‘run of the mill’ bland invoice will not necessarily catch the eye of the buyer if they receive numerous invoices on a regular basis. Therefore, it is very good practice to add something unique and attractive to your invoice i.e. colour scheme and layout.

Nevertheless, the effectiveness of an invoice does not end with the essential information required and the design and layout; it is all about maximising its potential. Make sure you dispatch your invoice within 24 hours of the goods or services being provided; do not save all your bills up to be processed at the end of the month. Send invoices electronically, if possible, to avoid potential postal delays or items going astray. Be polite: messages such as “please pay your invoices within 28 days” can often mean your invoice will be paid faster than when you use a message such as “payment terms: net 30 days”. Ensure you provide your bank details for payment and you might even wish to consider offering discounts to customers who pay within a certain time limit.

In summary, it’s important to treat your invoice with the utmost respect, ensure you incorporate the legal requirements, carefully consider the style and layout and make your invoice work for you.”

No matter how good your invoice is, it needs to be supported with a clear credit management process and an escalation strategy for if things go wrong

Unfortunately, even the best credit management process cannot eradicate bad debt due to insolvency, but you may be able to get credit insurance, which can help you to mitigate the risk. Check out our blog on this topic for more information.

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