What is an invoice? A complete guide to invoicing

Invoices might not be the most exciting part of running your business, but they’re essential for keeping your cash flow healthy and your records in order. Whether you’re a small business owner or managing a larger operation, understanding how invoices work—and how to streamline the process—can save you time, reduce errors, and ensure faster payments.

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Let’s break down what an invoice is and how invoicing influences accounts payable (AP). Then we’ll look at how the right tools, like automation and invoicing software, can optimize your payment process.

What is an invoice?

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An invoice creates an obligation for the customer to pay and helps ensure the seller receives the total amount due in full and on time.

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Invoices include key details like:

• An itemized list of the products or services purchased 
• Something here about price/unit breakdown per individual line item
• The total amount charged for the goods or services
• The date of sale
• A unique invoice number
• Any outstanding balances
• The payment due date
• Accepted payment methods
• Payment details, such as a bank account or credit card link 

As a legal document, an invoice solidifies the agreement between buyer and seller. Once issued, it becomes a permanent part of your sales records—it can’t be canceled or removed. 

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Invoices also play a vital role in protecting your business during audits. They provide clear evidence of where your income comes from or where your money is going, which can help address any questions from the IRS about your tax returns.

How invoicing influences accounts payable

Invoices play a critical role in managing your accounts payable and receivable. For the seller, an invoice is recorded as accounts receivable—a payment they expect to receive. Once the buyer receives the invoice, it becomes an accounts payable entry for them and reflects the amount due.

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Invoices also help businesses manage financial processes such as:

• Monitoring accounts payable to ensure timely payments
• Recording sales for inventory control, accounting, and tax purposes

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Businesses typically deliver products or complete services upfront, with payment collected afterward. 

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It’s important to note that purchase orders are a separate document created before a customer places an order and serve a different purpose. Similarly, bills differ from invoices and are typically issued after the payment is due.

How to create and send an invoice

Whether your company is brand-new to sending invoices or wants to polish an established process, you can create and send a physical or electronic invoice in five key steps:

1. Provide contact information: Include your business name, phone number, address, and contact details as well as the customer’s information
2. Describe the goods or services: Clearly list what was sold or provided, including quantities, unit prices, and totals
3. Include payment terms: Specify due dates, payment methods accepted (e.g., online payment), and any late fees
4. Calculate the total: Add up costs, taxes, and any applicable discounts to show the total amount due
5. Add important dates: Include the invoice date and payment deadline

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Once your invoice is ready, sending it to a supplier or vendor is equally straightforward:

1. Choose a delivery method—email, mail, or an invoicing software platform
2. Ensure all information is accurate before sending
3. Provide a copy to your accounting team for recordkeeping
4. Follow up if necessary to confirm receipt or pursue payment

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Keeping your invoicing process consistent and clear ensures faster payment and smooth communication with customers and vendors.

5 types of invoices and when to use each

Different invoices serve specific purposes. Using the right type for each situation makes it easier to handle multiple transactions. 

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Here are five common invoice types and when to use them:

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1. Proforma invoice

A proforma invoice is a preliminary document sent before goods or services are delivered. It outlines the estimated costs, including a breakdown of products, services, and associated fees. It resembles a standard invoice, but it’s not a demand for payment. Think of it as a commitment-free quote. 

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Proforma invoices are ideal for giving customers a clear understanding of expected costs and ensuring all terms are agreed upon before proceeding. Businesses often use them during negotiations or when providing estimates for custom orders.

2. Recurring invoice

A recurring invoice is issued regularly for ongoing services, subscription-based products, or routine maintenance. Recurring invoices automate billing for services that occur on a consistent schedule, such as monthly software subscriptions or IT support contracts.

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Recurring invoices help business owners manage predictable revenue streams and reduce manual work. With invoicing software, businesses can set up recurring invoice templates to save time and avoid missed billing cycles.

3. Credit invoice

A credit invoice is issued when a refund or credit is owed to the customer. It reduces the amount the customer owes or serves as proof of a refund. For instance, if a customer returns a product or is accidentally overcharged, a credit invoice adjusts their balance accordingly. 

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Credit invoices help maintain accurate financial records and provide clarity to both the business and the customer. 

4. Interim invoice

An interim invoice is used for large or ongoing projects to collect partial payments at different milestones. This approach lets service providers or contractors secure payment as the project progresses, alleviating the financial burden of waiting for the project’s completion to begin invoicing.

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For example, a construction company may issue interim invoices after completing specific phases, such as design approval or foundation work. Interim billing ensures steady cash flow and keeps the project on track.

5. Past-due invoice

A past-due invoice is sent when a payment deadline has passed without receiving the expected funds. It serves as a polite reminder of the overdue amount and may include penalties like late fees. These invoices help maintain cash flow and encourage prompt payments. 

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To remain professional, businesses should keep the tone courteous while clearly outlining the overdue amount, the new payment deadline, and any additional charges.

How to choose the right payment terms for invoices

Payment terms on invoices specify when and how customers are expected to pay. These terms help businesses manage cash flow and set clear expectations with customers. 

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Here are five common payment terms and when to use them:

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1. Net X

Payment is due within an agreed-upon number of days of the invoice date. Net 30, for example, means payment is due in 30 days. This approach is common for businesses offering standard credit terms. For example, a consulting firm might use net 30 for ongoing client projects.

2. End of month (EOM)

With end-of-month terms, payment is due by the end of the month regardless of the invoice date. EOM is ideal for businesses that want to standardize payment cycles, like suppliers working with multiple clients.

3. Payment in advance

With payment in advance, payment must be made before the product or service is delivered. Payment in advance is used for custom orders or high-value services, like event planning or special manufacturing projects.

4. Upon receipt

With upon-receipt terms, payment is due immediately upon receiving the invoice. Upon receipt is often used by small businesses or freelancers to ensure prompt payment. For example, a graphic designer might use these terms for one-time design work.

5. 2/10 Net 30

With 2/10 net 30 terms, the supplier offers a discount of 2% if the payment is made within 10 days, but the full amount is due in 30 days. Using 2/10 net 30 payment terms incentivizes early payment and improves cash flow.

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Choosing the right payment terms depends on your cash flow needs, the nature of your business, and your relationship with the customer.

How automation streamlines invoicing

Accounts payable automation software makes invoicing faster and less stressful. It uses AI to handle tedious tasks like data entry, flag errors, and create smart approval workflows. It also keeps vendors updated and offers better visibility into the payment process.

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Quora’s finance team is a great example of how automation can turn things around. Before using Ramp, they struggled with a clunky, time-consuming system. 

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Here’s how Ramp’s AP software helped them:

• Faster bill processing: What used to take 5–8 minutes per bill now takes just 1–2 minutes
• Simpler vendor setup: Adding new vendors is quick and accurate, meaning fewer payment errors
• Better visibility: Real-time updates make it easy to track invoices and payments, cutting out delays
• Fewer manual tasks: Ramp’s integration with NetSuite reduced unnecessary steps, taking them from more than 10 clicks to just three
• Quicker monthly reconciliations: Wrapping up monthly accounts went from taking 2–3 hours to just 15–20 minutes

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Overall, Ramp helped Quora save more than five hours every month. With less time spent on invoicing, their team had more freedom to focus on improving processes and supporting employees.

Get hours back each month with Ramp 

Invoices don’t have to be a hassle. Ramp AP software simplifies invoicing by automating tasks and tracking payments easily. It speeds up payments, saves time, and lets you focus on growing your business.

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Bratjen Construction was struggling with tedious manual processes and inefficient approval workflows when they decided to partner with Ramp. Here are a few of the benefits they experienced with Ramp’s automated accounting platform:

• Cut expense reconciliation from 2 weeks to 1 or 2 days: Automating the once-manual task of coding and matching checks one by one was a huge time-saver.
• Caught up month-end close by an entire month: The company moved from running two months behind on closing to just one month. This also gives them a more accurate picture of their current finances and helps them make projections more easily. 
• Streamlined disjointed processes: Ramp features like automated approval workflows, error flagging, and photo receipt capture helped Bratjen cut out repetitive tasks, random to-dos, and accidental overpayments.  

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Ready to make invoicing easier for your business? Ramp can help.