How to properly separate billing and invoicing for maximum efficiency

In business, terms are sometimes used interchangeably, even when they don’t describe the same process. Billing and invoicing are common examples of this. Billing is used for up-front purchases. Invoicing is for goods or services sold on credit. The timing, terms, and expectations are all different.

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This is a simplified explanation, but for business owners, it's important to know the distinction between the two and learn how to optimize, or automate, both. In this article, we'll define billing and invoicing, explain challenges they both present, and share how Ramp can help you automate both.

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What is billing?

When eating in a restaurant, the customer receives a bill on the table at the end of the meal. The expectation is that the bill will be paid before they leave the establishment. This is a common practice in the retail industry and a good example of how billing works. There’s no credit involved, payment is completed immediately, and the customer is given a receipt.

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A bill is generally used for one-time services. It’s a commercial document that serves notice that a financial transaction is about to take place. This should not be confused with a receipt, which is evidence that the transaction has already concluded. The bill outlines what the customer owes with details on price, taxes, and modes of payment that are accepted.

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There are instances where a company will bill for an initial service and then use invoicing for repeat business. Service businesses, like lawn care companies, sometimes employ this technique. They’ll charge you to mow your lawn for the first time, then set you up on monthly invoicing if you want to continue working with them.

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From an accounting perspective, billing creates immediate cash flow. That’s important for a retail business because they need to constantly resupply or restock their inventory. Restaurants have food costs. Lawn care services pay for gas and labor. Cleaning companies need chemicals. Billing gives them more immediate bandwidth to cover those costs.    

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What is invoicing?

One of the most misused statements in business is, “we’ll send you a bill.” That suggests that the service or product has not been delivered yet. A bill comes when the delivery occurs. If there’s a delay in payment for something, you’re invoicing, not billing. Any accounting software for small business can distinguish between the two.

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Let’s go back to the restaurant example. Some restaurants offer corporate catering services for larger groups. With good credit, your company may be able to host a meal there for your employees and pay for it after the fact. The restaurant will create an invoice for the amount owed and send it to you. If you were paying on the spot the day of the event, you’d get a bill. 

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Businesses that offer goods or service on credit use invoices to collect their money. The terms on these invoices vary. They could be net-30, which is payment due in thirty days, or the company could offer net-60 or net-90 terms. You’ll most often see the longer terms offered on higher-ticket items. Smaller purchases are either billed or come with net-30 terms or less. 

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This doesn’t just apply to how you collect money. Understanding how net terms work is also important for organizing vendor invoicing. Companies have inflows and outflows. If you’re invoicing for your goods and services on net-90 terms and your vendors are only giving net-30, that could cause a cashflow problem. We’ll get into that in more detail below. 

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Billing vs invoice: what’s the difference?

To help understand the differences between billing and invoicing, we put together a table to itemize the finer points of where bills and invoices are not the same. Classifying them properly is important, particularly if you’re using an integrated accounting system that connects to financial reporting or tax preparation tools. 

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Bills are given to customers. Invoices are sent to clients. The distinction may seem trivial, but it’s a good way to understand where your revenue is coming from. You could also think of billing as the payment path for one-time orders and invoicing as something you use for recurring business. Invoicing is more detailed and can be used for financial reporting.   

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Related terms to know 

• Quote: A quote is neither a bill nor an invoice. It’s an itemized list of goods and services with their respective cost, along with a total cost for the entire package. 
• Receipt: A receipt is a confirmation of payment given to the client or customer, after the invoice or bill has been paid in full. Receipts are often used for expense reimbursement. 
• Net terms: This is a descriptor for the number of days a client has before an invoice is due. Net-30 means due in thirty days. Net-90 means due in ninety days.  
• Due upon receipt: If payment is due upon receipt of the goods or services, the payment request is a bill, not an invoice. This is common in the retail and restaurant spaces.  
• Dunning: This is a collections term. Dunning refers to the process a company uses to communicate with a client when an invoice becomes overdue.  
• Write-off: This is an accounting term. When invoices go unpaid for an extended period after they’re due, the company can write them off as a loss on their financial reports. 

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Common business challenges with managing bills or invoices

This all boils down to managing your revenue streams. Bills create instant cashflow. Invoices represent money that’s owed, aka accounts receivable. How you collect money will determine how you handle small business expense management, how you pay employees, and whether you make your bill payments on time. There are challenges to this, including the following:  

Manually logging bills or invoices digitally

Many small businesses still use paper bills and receipts. Reporting and tax filings are typically submitted digitally. That means you need to convert the paper into a digital format, a manual process fraught with human error. There’s also a labor cost for doing this and mistakes can have a lasting effect on financial reporting and tax filings. Utilizing a small business expense management software can significantly streamline this process, reducing the likelihood of errors and saving valuable time and resources.

Categorizing expenses

Paying a bill at a restaurant generates a receipt that can be submitted for expense reimbursement. That’s easy to categorize. Invoices that are processed through the company aren’t so simple. Without invoice approval software, they require manual examination and a lot of guesswork. That can create a mess for the accounting department.  

Managing net terms on cash inflows and outflows

Companies utilizing accounts payable software with bill pay automation rely on cashflows to make sure funds are available when those bills come due. Offering net terms on your invoicing can delay those cashflows and potentially cause defaults in your payment system. To prevent this, you also need to automate invoice processing. The two systems need to be integrated for best results.  

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Automate bill payments and invoice management with Ramp

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With Bill Pay, businesses can leverage AI-powered invoice processing and vendor payment automation to help them manage bills and invoices. For added convenience, Bill Pay integrate seamlessly with your accounting and bookkeeping software and you can even pay bills with your Ramp card and get 1.5% cashback.

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As companies grow, the organization of billing and invoicing becomes more difficult. Manual processes get overwhelming when the paper starts to pile up. Ramp can automate your billing and invoicing, categorize expenses, and help you set up spend controls that can keep your budgets in line.