While your teams are busy with everyday tasks and handling clients, it's easy to get overwhelmed by another important facet of business operations—invoices. Businesses need to be on top of their game to ensure they send invoices and get paid properly so that their cash flow remains consistent. But through the different stages of a project, depending on the due date, type of industry, compliance requirements, regional dependency, and more, there are multiple invoices that businesses can send to their customers. Knowing which to send and when is vital. This article dives into the specifics about 15 different types of invoices and their purpose, with relevant examples for each use case, so you can send the right invoices out faster and get paid on time.
Here are the different types of invoices used in simple transactions between a buyer and a seller or service provider.
A proforma invoice is an estimated invoice that the seller sends to the buyer prior to providing any goods or services. It states the estimated cost, delivery date, and other details about the goods to be delivered or the services to be completed. After screening the proforma invoice, the buyer gives the green light to the seller to start working on their side of the deliverables. Some of the fields mentioned in a proforma invoice are the items to be sold, their quantity and price, delivery date, and the shipping address. To understand this type of invoice in-depth, here's a more elaborate guide on proforma invoices.
Zylker Bottles, a bottle manufacturing company, gets a request for 500 plastic bottles worth $4,000 (price of each bottle is $8). They can prepare a proforma invoice that contains the rate of each plastic bottle, any applicable discounts or taxes, the total price, the estimated delivery date, and more. Looking at the proforma invoice, the buyer can negotiate further or ask the seller to begin manufacturing the plastic bottles.
This is what we classically think of when we hear the term "invoice." A sales invoice gets sent to a buyer to request payment for a product or service. It contains fields such as seller information, buyer's address, delivery date, payment terms, items and their rates, and the total price; it also has information the buyer can use to make payments, such as bank details and payment links. Once the payment has been made, the invoice acts as a legal record of the transaction. To learn about this in detail, here's a guide on invoices.
After Zylker Bottles has finished manufacturing 500 plastic bottles, they need to collect the payment from the buyer before they ship the goods. Zylker Bottles can send an invoice that contains the total money owed to them along with their bank details so that the buyer can make the payment.
An overdue invoice is an invoice that is past its due date. When an invoice is sent, a due date for payment is often mentioned. When the buyer fails to complete the payment within this stipulated date, the sales invoice becomes an overdue invoice and the buyer becomes a defaulter. The seller can do any of the following:
Say Zylker Bottles specified their payment terms to be 30 days, but it's been 5 days past the due date and the buyer has still not made the payment. The regular invoice becomes an overdue invoice, and Zylker Bottles can now send a payment reminder to the buyer, requesting that they make the payment as soon as possible with a 5% late fee charge.
A consolidated invoice groups existing invoices under the same customer's name and compiles them into a single invoice with one grand total. This saves the buyer a lot of time since they don't have to pay for each invoice individually.
If Zylker Bottles gets another order for 200 metal bottles from the same buyer, they can send a consolidated invoice post-manufacturing that compiles the items in the first invoice (500 plastic bottles) and the second invoice (200 metal bottles) before sending it as a single invoice.
When working on a project, you may need to deploy a more elaborate invoicing process. Take a look at the types of invoices used in projects:
A retainer invoice is sent to a buyer to collect prepayments for a task that will be done in the near future. The amount mentioned in the retainer invoice is paid by a client to reserve and have access to a business's services as required in the future. This is also common when collecting advance payments needed for capital or logistics, or as protection against cancellation.
Zylker Notaries is reached out to by a client who is looking for legal assistance, but the client is unsure of how long they will need the notaries' time or how much they will be charged. Zylker Notaries can raise a retainer invoice to collect an advance deposit from the client so that every time the client consults them, an amount can be deducted from their deposit as fees.
Interim invoices are partial invoices that contain only a portion of the final invoice's fee to help fund the project and cover the operational expenses. Interim invoices are also used for larger, more expensive projects because the total amount can be broken down into smaller invoices to make it more affordable. The interim invoice amount is determined by the percentage of work completed or on the milestones achieved throughout the project.
Zylker Constructions has agreed to build a 20-story building for a client in a span of 2 years. After completing the foundation, which is 1/4th of the total work, Zylker Constructions can send an interim invoice that requests payments for 25% of the total invoice amount.
Timesheet invoices are used when businesses charge clients based on the number of hours their employees worked on the project. Timesheet invoices generally apply for services and are calculated by defining each employee's per hour charges and then multiplying them with the total hours worked on the project. Some of the elements that are included in a timesheet invoice are the tasks worked on, hourly charges, total hours worked, the start and end date of the project, and administrative fees.
Zylker Designs charges $25 per hour for its website designs. If a website design for a client takes 10 hours to complete, the total charge for this project is $250 ($25*10).
A final invoice is the last invoice sent at the end of a project that highlights the total amount owed to the product or service provider. This total is calculated by deducting the retainer invoice and interim invoice amounts from the total amount owed. Like a regular invoice, the final invoice has fields like payment terms, the invoice creation date, items, subtotal, deductions (retainer and interim invoice totals), and the invoice total.
Zylker Constructions, upon completing the 2-year long project mentioned above worth $10,000, can deduct the payments received via interim invoices ($2,500) and send the final invoice to the client to get paid $7,500 ($10,000 - $2,500).
The following types of invoices are not used for sales but to make corrections to past transactions via credit and debit.
Contrary to regular business transactions where the buyer pays the seller, a credit memo is used when the seller owes the buyer money. This credit memo is a document sent to the buyer that acknowledges the owed amount and issues a form of credit to the buyer. The buyer can later use these issued credits on future purchases from the same seller. Credit notes are normally issued when:
A buyer has purchased 500 plastic bottles from Zylker Bottles and then discovers that 25 of those bottles were damaged. This equates to $200 in damages. After being informed about this, Zylker Bottles can issue a credit memo to the buyer with a total of $200, and the buyer can redeem these credits during their next purchase.
A debit memo is issued to clients to make changes to past invoices and increase the total amount owed by the client to the business. It's similar to a sales invoice, but the only difference is a sales invoice is sent when a product or service is sold and a debit memo is sent to make adjustments to invoice totals of previously sold products or services.
If Zylker Bottles has already invoiced its buyer for the 500 bottles ($4000) and, due to unforeseen circumstances, needs to surcharge the buyer an extra 8%, they can issue a debit note to the buyer for the additional $320.
A mixed invoice combines both the items in a credit memo and a debit memo and shows the aggregate as the total.
Let's put together the last two examples mentioned: the aggregate of $200 worth in credits and the $320 mentioned in the debit memo is $120 of debt, which means the buyer still owes Zylker Bottles $120. Thus, a mixed invoice can be sent to the buyer to depict how the $120 was arrived at and the total money owed.
The following types of invoices are used in specific scenarios when needed:
A commercial invoice is a document created as proof of an international transaction between a buyer and a seller for legal purposes. It can primarily be used to calculate tariffs, determine taxes, and obtain customs clearance for the shipment of goods in and out of a country.
A recurring invoice is an invoice that is sent on a recurring basis for products or services offered repeatedly. Recurring invoices are generally sent on a weekly, monthly, or yearly basis, and the customer needs to make sure the invoices are paid on time to continue using the product or service. Some examples of scenarios where recurring invoices are applicable are gyms, internet service providers, music and video streaming services, and other SaaS products.
Here are the different types of invoices categorized based on their formats:
Digital invoices are invoices generated using software. The seller simply needs to input information like the details of the seller, the items' names, quantity, price, and the total money owed, and the software will create an invoice for them. Digital invoices can be created and customized using word processors, spreadsheet tools, downloadable templates, online invoice generators, and dedicated invoicing software. The process of creating digital invoices can be automated, but these invoices cannot be processed using other invoicing and accounting tools. Regardless, it is the most commonly used invoice type today.
Unlike a digital invoice, an e-invoice has a structured format that is issued, received, and processed electronically without any manual intervention. E-invoices are known for their interoperability between different billing systems. This means the buyer's accounting system can read and understand receipts and invoices that were created by the seller's invoicing system, thus automating the end-to-end Accounts Receivable and Accounts Payable processes. Since taxes can be filed using e-invoices directly, they help in reducing the scope for tax evasion, and governments are starting to mandate e-invoicing in many countries.
Depending on your industry and business model, you may have to educate yourself on the different types of invoices. A general rule of thumb is to take a moment to identify the purpose of the invoice before creating the draft. It could be to negotiate, collect advance payments, or make adjustments to an older invoice. Once that is well-defined, go ahead and pick the right types of invoices that get the job done.
Although there are various templates and invoice generators available on the internet, adopting a dedicated invoicing solution like Zoho Invoice can help freelancers and small businesses streamline their invoicing and payment collection. If you're looking for a free invoicing tool, we encourage you to try Zoho Invoice!
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