If you are wondering, “What is an invoice?” you’re in the right place. Our team at Remitly created this guide to give you the full story on invoices, tailored for a Canadian audience.
For entrepreneurs, especially those new to Canada, managing cash flow and getting timely payments from customers is key to business success. The invoicing process is how most businesses collect money from their customers, making it important to understand how it works.
What is an invoice?
An invoice is a formal request for payment. A typical invoice outlines how much is owed, the payment terms, and details of the products or services provided.
If you’re a small business owner, bookkeeper, independent contractor, or just looking to bill clients for your side hustle, you will need to know about invoicing and which types of invoices apply to your work.
Invoices can come in different forms. The paper receipts you get at stores or restaurants are a common example. You have also probably received an invoice from a telecommunications provider or a utility company as a monthly bill.
Historically, invoices were paper-based, with multiple copies so the buyer and seller could each keep one for their records. Today, it is more common to send invoices electronically by email or through a secure platform. You can still print electronic invoices on demand or send them through the mail if needed.
Read on to learn more about common types of invoices and similar documents, plus some popular tools for creating and managing them.
The basics of an invoice
First, an invoice should clearly state that it is an “Invoice” near the top.
Beyond that, invoices should contain the following elements:
Invoice date
This is the date you created the invoice to send to the customer.
Invoice number
This is a unique identifier or reference number. You can use it to track the invoice for both internal bookkeeping and external reference. Companies typically assign invoice numbers sequentially for easy tracking.
Contact information
An invoice must provide the business contact information of the seller or service provider. This includes the business name, address, phone number, and email. It is also common to include your Business Number (BN) and GST/HST number if you are registered to collect sales tax.
Payment process and terms
Invoices outline the payment terms, such as:
- Due date: The final date the recipient has to pay. After this date, the invoice is past due and may incur a late fee.
- Payment options: How a person can pay, such as through Interac e-Transfer, bank transfer, or credit card.
- Late fees: The amount added to past-due invoices, as agreed upon in your service contract.
- Other terms: Any extra information, such as whether you accept partial payments.
Cost breakdown
This is a detailed list of money owed. It includes the unit price of an item, total units purchased, shipping costs, and any applicable taxes like GST, HST, or PST.
Credit invoice vs. debit invoice
There are two main kinds of invoices: credit invoices and debit invoices.
A debit invoice, or debit note, outlines money owed for a product or service. It is an attempt to collect payment and is the most common type of invoice.
A credit invoice, or credit note, is for money given back to a customer. You might send a credit invoice if:
- A customer returns an item.
- You need to refund a customer for a cancelled service.
- You made a pricing error on the original invoice.
- You decide to offer a partial or full refund for any other reason.
Different types of invoices and related forms
Businesses can use many types of invoices and related forms. The type usually depends on the industry, how you bill for your services, and how often you plan to get paid.
1. Standard invoice
A business issues a standard invoice to a client after providing goods or services. It outlines the payment terms, the amount owed, and details of the work completed. This is the most common type of invoice for most small businesses, as its format is flexible enough for most industries and billing cycles.
2. Proposal or quote
If you run a business or work as an independent contractor, you may bid on jobs. This process often involves preparing a proposal or quote for the work to be done. While not technically an invoice (it isn’t a request for payment), it often looks like one, with line items showing the estimated cost of labour and materials.
3. Interim invoice
For larger projects, it might make sense to break work into smaller pieces and bill clients at intervals. An interim invoice is a bill for a portion of the job, allowing you to get paid as you go rather than in one lump sum at the end. These are followed by a final invoice detailing all work and payments made.
4. Timesheet invoice
A timesheet is another form that can serve as an invoice. A timesheet invoice is used when a business or employee bills based on the number of hours worked at a specified pay rate. It is common for professionals who bill clients hourly, such as lawyers, consultants, and creative agencies.
5. Pro forma invoice
A pro forma invoice shows the agreed-upon pricing and terms before work begins or goods are delivered. It acts as a good-faith estimate, much like a quote but in an invoice format. Pro forma invoices may be required before goods can pass through customs for international shipments.
6. Recurring invoice
A recurring invoice is used when a business charges the same client for services on a regular schedule, like monthly or annually. These are common for subscription services or retainer agreements where the price is consistent.
7. Final invoice
A final invoice is sent upon completion of a project. It includes an itemized list of all services provided, the total project cost, and a summary of any interim payments already made.
8. Retainer invoice
Similar to a proposal, a retainer invoice is sent to a customer before work begins. Its purpose is to collect an upfront payment or deposit, known as a retainer, so you can start the project.
Invoice vs. purchase order
An invoice is different from a purchase order (PO). A PO is sent by a buyer to a seller to place an order and confirm details like item types, quantities, and prices. In contrast, an invoice is sent by the seller to the buyer after the order is fulfilled to request payment.
Invoicing tools and resources
Invoices are essential for accounting, tax, and inventory purposes. When an invoice is sent, the amount due is listed in the buyer’s accounts payable and the seller’s accounts receivable.
Many software solutions can help organize your bookkeeping and streamline invoicing. They can help you create templates, set up recurring invoices, and collect payments.
To create invoice templates, you can use:
- Microsoft Office: Excel and Word have easy-to-use invoice templates.
- Canva: This service helps create more visually appealing invoice templates.
- An online search for a “free invoice generator” will also provide many options.
To organize your bookkeeping or accounting systems, you might consider:
- QuickBooks: Offers a full suite of accounting tools to help you track payments, set up recurring invoices, manage cash flow, and prepare for tax time.
- FreshBooks: This Canadian-based solution helps small businesses track sales, automate invoices, and collect online payments.
How to collect payment on an unpaid invoice
As a small business owner, you should expect payment delays from time to time. It is important to have a process for collecting on late payments.
Here are some general steps you can take.
1. Identify the past-due invoice
The first step is to identify your outstanding invoices. If you use accounting software, you can run reports to find them. Otherwise, you will need to check your records manually.
2. Issue a friendly reminder
Once you know which invoices are past due, send a polite email or mail a reminder. Refer to the original invoice number and date. To maintain good customer relationships, always be respectful and avoid making accusations.
3. Send a final reminder
If you do not receive payment after the first request, send a follow-up. Let the customer know this is the final reminder, again referencing the original invoice details.
4. Call the client
If the invoice remains unpaid, a phone call can help you understand the reason for the delay. You might be able to work out a payment plan.
5. Take final actions
When an invoice remains unpaid even after a phone call, you can take further action. It’s a good idea to consult a legal professional at this stage to ensure you comply with provincial laws.
Final actions may include:
- Sending the debt to a collections agency.
- Discontinuing service.
- Assessing late fees or interest as outlined in your original payment terms.
You should notify the customer of your intent before taking these final steps to give them one last chance to pay.
Frequently Asked Questions (FAQs)
What should I do if a customer disputes the invoice?
If a customer disputes the invoice, start by reviewing the details of the invoice and any supporting documentation. Communicate with the customer to clarify the issue and attempt to resolve the dispute amicably. If the dispute cannot be resolved directly, consider mediation or seeking legal advice.
How long should I wait before taking final actions?
The waiting period before taking final actions can vary depending on your payment terms and local regulations. Generally, it’s reasonable to wait 30-60 days after the due date while making consistent efforts to contact the customer.
Can I charge interest on overdue invoices?
Yes, you can charge interest if your original payment terms explicitly stated this policy. Be sure to check local laws, as there may be limits on the amount of interest you can charge.
When should I consider using a collections agency?
A collections agency can be a good option if your efforts to collect the debt yourself have been unsuccessful, especially after repeated follow-ups and notices. Ensure you notify the customer in advance that their debt will be sent to collections.