Freelancers' and small business owners' guide to proper invoicing

When you first become a freelancer or a small business owner, you probably anticipate and prepare for hard challenges, like finding and keeping clients, staying profitable, and marketing your business properly.

However, sometimes overwhelming challenges stem from the least expected areas.

Invoicing is one such blind spot. Most don’t lose their sleep over it. Yet many freelancers and small business owners find it hard to figure out when they should send invoices, how to format them, and how to get them processed quickly.

This lack of awareness comes at a steep cost. According to a report by Almato, 61% of late payment occurs because of incorrect invoices.

This article dives deep into invoicing for freelancers and small business owners. Keep reading to learn how to raise proper invoices and forever say goodbye to delayed or non-payments.

What is an invoice?

Before we move on to the other sections, let’s revisit the (link: https://fincent.com/glossary/invoice text: definition of an invoice) for better understanding and setting the right expectations.

An invoice is a legal document that a business owner or a contractual service provider sends to their clients, indicating the payment due for their work.

Since it's a legal document, apart from getting paid, you will also need it for (link: https://fincent.com/blog/tax-filing-extention-deadlines-everything-you-should-know text: tax filing), (link: https://fincent.com/blog/how-to-outsmart-an-irs-audit text: IRS audits) or other purposes. So, your invoices should follow specific formats and cover all the required details.

Importance of invoice:

Invoices are more than pieces of paper with some quotes written. Here are some reasons to treat your invoices with respect as a business owner or a freelancer:

Maintaining records:

Nothing screams unprofessionalism than not knowing what work you have done for your clients and whether you received the payment for your work. The last thing you want is to suffer in silence when you should have asked for your payment.

With invoices with the correct formats, you can avoid such unpleasant situations. Invoices keep track of important info such as whom you worked with, how much your clients need to pay, the deadlines and much more. Also, keep your invoices organized so you can retrieve them anytime.

Payment tracking and cash flow:

Invoices keep records of how much money is owed and how much has been paid already. This information can be utilized in so many ways: you can determine which clients are the best for you, what pricing model generates maximum revenue, which services are profitable and so on.

Also, your invoices can reveal a lot about the state of your cash flow and how to improve it. For example, if your payment terms allow you to raise invoices only after the project's closing, your monthly cash flow might suffer. However, it can be easily addressed once you introduce interim invoices during an ongoing project in place of one big final invoice.

Help with taxation:

Many business owners make the mistake of delaying their tax preparation till the final hours. And then they start tearing their hair out once they realize they have no clue where their payment details are.

If you are a freelancer, your clients will send you (link: https://nlmain.fincent.com/blog/1099-tax-calculator-for-self-employed-workers-and-independent-contractors text: 1099 forms). How would you fill those boxes in if you lost some crucial information? The IRS also wants you to keep your invoices saved for up to [3 to 7 years].

Fail to file your taxes properly and a hefty penalty waits for you .To avoid chaos during the tax season, you want to collect, save and organize your invoices early.

However, managing invoices is challenging, especially when you have many long-term clients/customers. Of course, folders and google sheets can be an option, but those soon become obsolete as your business grows.

However, Fincent has an easy solution to the problem.

It automatically keeps track of every invoice you send to that client, invoice status and payment arrivals once you add your new customer to the “directory”. If you click on your client’s name, you can see the entire transaction history in one place.

Here is what it looks like in real:

Legal protection:

Though very rare, sometimes you have to drag non-payment-related disputes to the courtroom. In such situations, you might need to produce your invoices before the court, as those can serve as legal proof and turn the tide in your favour.

Also, if you ever get audited, your invoices can back up any income you mentioned.

Types of invoices:

All invoices aren’t the same. Depending on your business model, contract terms and the nature of the project, you might have to send different invoices.

For example, the standard invoice is not the most convenient format if you charge by hours. A timesheet invoice, in this case, would be fitting as it allows you to document all the productive hours you spent on the project in an organized manner.

Here are some common invoices freelancers and small business owners use for their businesses:

1. Standard invoice: Standard invoice is the most common invoice in use among small business owners, freelancers and consultants. It’s so popular because of 1.) its flexibility to fit in most industries and billing cycles and 2.) It's simplicity.

   To create one, you need to provide the following information:

   • Your business’s name, address and contact information
   • Your client’s business name, address and contact information
   • An invoice number
   • The amount of money you expect to receive

2. Debit invoice: Sometimes, the money your clients owe to your business may exceed the expected amount. For instance, you might have to invest some additional hours on the same project after sending your first invoice. Or maybe, your client requested some extra services, and you have to send them an invoice for those services on top of your standard invoice.

In such cases, you want to raise a debit invoice. It keeps a paper trail of all the transactions between two parties, which can help auditors and CPAs in the future.

3. Interim invoice: If you are involved in a large and long-term project, you want to raise multiple invoices based on agreement terms. It works like this: once you complete a certain task or achieve a milestone, you send an invoice for the things you achieved.

Interim invoices are perfect for such situations. It ensures uninterrupted cash flow to your business when the completion of the project is far away.

4. Timesheet invoice: Charging per-hour model is pretty popular among many segments of small business owners and contractual service providers: Freelancers, consultants, attorneys, medical professionals and many more. Based on this model, you need to track the hours you worked and then multiply your hourly rate with it for the final amount. The standard invoice doesn’t apply here, as you can’t show the billable hours.

Therefore, you need a timesheet invoice for the hourly charge model. It allows you to list your billable hours for better understanding.

Invoicing mistakes.

Right invoicing practices often don’t get the same attention as other business areas. As a result, many make seemingly “harmless” mistakes, such as waiting for too long or not following up, which impacts businesses in the long run. Let’s cover a few such pitfalls.

Mistake #1: Not Promptly Sending Your Invoice

If you don’t have at least some business/freelancing experience yet, you might wonder when exactly you should send the invoice.

The answer: Right after you send your deliverables.

The sooner you send the invoice, the faster your customers/clients process it. And it can significantly affect the amount of cash available to you at a given time. So don’t wait till the end of the month or for your client/customer to ask for it.

Also, if they have to remind you of your invoice, it sets a bad precedent. They might get the impression that getting paid ASAP isn’t your first priority; hence, delaying the payment is okay.

Long story short, if your work is complete, generate your invoice.

Mistake #2: Failing to Specify a Due Date for Payment

A proper invoice should have a due date on it.

Because when you “wing it” by not mentioning a due date, it might get interpreted differently on the other end– Your customers/clients might delay longer than your expectation or forget to pay at all.

Also, you need a deadline if you plan to charge “late fees”.

So, don’t forget to clearly mention your due date. And if your contract terms permit it, mention the amount of the late fee that would incur on the failure of the payment.

And, of course, strict invoicing deadlines help predict your cash flow. When you have a clear idea of when you be paid, calculating your cash flow becomes easy.

Mistake #3: Sending The Invoice to the Wrong Person

While discussing your payment terms, you must get the contact info of the right recipient.

If you send it to the wrong person, in the best-case scenario, the recipient can point that out to you or forward it to the right person. The whole process will delay your invoice clearance from your customer’s side.

However, there is a good chance you won’t be that lucky. This confusion will significantly delay your payment while you are ricocheting between multiple individuals for receiving your payments.

This is bad news for your business, cash flow and mental peace. So tie those loose ends right at the start by finding who your billing contact is, and cross-check the recipient’s email once before emailing your invoice.

Mistake #4: Not Itemizing Services

Your invoice doesn’t always need a detailed and itemized breakdown of your services. A standard invoice with essential information is good enough for most cases.

That being said, your invoices should include the zoomed-in view of services and deliverables, regardless of whether they are requested. Some customers prefer meticulous bookkeeping and a detailed invoice helps them report and categorize their expenses.

That also helps a lot in case you have to take the legal route to resolve any dispute you might have with your customers. So err on the side of caution and provide details.

Mistake #5: Not Following Up

More often than not, your invoices will be late. Recent stats revealed that in the post-pandemic US, the average rate of punctual invoice payment is 29.1 % only.

Delayed payments have crippling effects on small businesses. Up to 30% of SMEs expect adverse consequences of late payments on cash flow which, in turn, negatively impacts different areas of their business operations.

The solution to this problem is simply to follow up.

Your customers/clients can have a multitude of legit reasons for not paying on time, ranging from their own cashflow problems to any issues from the bank’s end.

However, by following up, you can help your clients prioritize invoice clearance. Instead of putting things on the back burner, they sort things out from their end and pay off all the dues.

Following up on your invoice also communicates that you maintain certain professional boundaries. As you probably understand, boundaries are essential for any healthy business relationship.

Therefore, don’t wait too long for your client’s response when your invoice payment is delayed.

Now pursuing multiple invoices at the same time is time-consuming: On average, small businesses spend 15 days per year chasing late invoices.

However, Fincent makes following up on your outstanding invoices way easier.

First, go to the “Get Paid” page and click on the “Requested” tab. You will find your requested payments' current status and the “Request Repayment” option. This option allows you to send a reminder directly from the dashboard with a click.

You can view the entire workflow in the following gif.

Mistake #6: providing inconvenient payment options

Many first-time freelancers and SMB owners don’t think much while selecting their modes of receiving payments. They expect to receive the fund through the modes of payments familiar to them.

However, those may not be convenient for clients at all. A great example: A freelancer might prefer a Payoneer transfer, but his client has only PayPal for international payments.

When this happens, the client has to pause the payment process till a solution is found.

To evade such unintentional delays, discuss the most convenient payment modes for both parties right after onboarding. Later you want to include all those modes of payment while creating your invoices. You can also try the most popular payment options such as credit card payment, bank transfer, Paypal transfer and stripe.

Mistake #7: Sending an incorrect invoice

Your invoices should always be error-free. There is no room for unintentional mistakes like spelling mistakes, incorrect date of issue, due date missing, incorrect amount or the absence of any requested breakdown of your services/deliverables.

You also want to make sure you include the correct names and added terms at the bottom of the invoice.

It’s important because your customers/clients feel assured when they feel you have a professional attitude. An invoice riddled with errors immediately hurts your professional image in an instant. Not to mention, error correction might delay the invoice payment.

So first, you want to run your invoice through grammar checkers for proofreading. Then check for any missing or incorrect info. The whole process takes around 5 - 10 mins and saves you a lot of back and forth.

How to create an invoice

So far, this article has touched on what proper invoicing is and what to avoid. Now let’s move on to how to create an invoice format for any document.

• Be consistent with your Brand.

Invoices are essentially legal documents. Therefore, like most legal documents, your brand presence on your invoice is a must. Use the same logo, design, font and other branding components that you use on your website, marketing collaterals and other places.

In a nutshell, you want your brand design to be congruent across all the channels, and it should reflect on your invoices.

• A professional header

Place a professional header in the top left corner of your invoice. This header should include your business name, address and contact information. Right below your business info, place your customer details: the name of the contact person, the customer’s business name, address and contact information.

If your business is responsible for collecting sales tax by law, then include the business’s tax ID as mandated by local law. Please note that if you are doing business with international clients, you must also consider their countries' tax law compliances. For instance, if you sell to EU customers, you must apply for a VAT number.

• Invoice information

The top right corner of your invoice is for your invoice information. The first thing you should include here is a unique alphanumeric invoice ID number to track your transactions. Other pieces of information, such as the project name, invoice date and due date, should be right below your invoice ID.

• Description of services/ products delivered.

This box is where you provide a detailed description of your services/ products. In the case of a standard invoice, include each item sold, the rate per unit and the subtotal. For freelancers or service providers, a detailed service breakdown and associated charges are required.

For example, if you did a copywriting job, mention what you did (email copy, landing page copy), your charges for each completed work and the subtotal.

This section is to make your work and pricing more transparent. Many clients might need this breakdown while filing taxes (depending on various tax laws), so it also helps them too.

• Tax details and the total money owed

Sometimes your total receivables may be different from your service charge subtotal. Because if you are liable to collect certain taxes or offer discounts, you need to calculate and add those to the subtotal to get the total amount.

You may also want to specify payment methods (based on the discussion between the two parties), currencies that your business accepts, late payment penalties and other payment conditions.

• Payment terms and notes

Both parties should be on the same page regarding the payment terms way before you send your customers the invoice. However, you can still include terms and notes to prevent any confusion.

For example, you might remind them that a late fee of 5 USD/day will be applicable if they fail to process the invoice within the due date. Or sometimes you can conclude it with a simple “thank you”.

Usually, payment terms and notes are placed in the bottom left corner of the invoice.

This process is enough to create an invoice format for your business. However, as always, Fincent provides an easier way to do it with far fewer chances of human errors creeping in.

Head to the “Get paid “ tab and click on the “Add an invoice” link. Then just submit the following information and your invoice will be ready:

• Client’s email address
• Total amount
• Due date
• Project/ product details.

Everything else, including payment options, is already stored on the platform. As shown before, it only takes a few clicks to follow up and reveal the entire transaction history from the dashboard.

Here is a gif for better understanding:

Conclusion:

Doing invoicing rights might sound trivial, but it greatly impacts your business's financial condition and taxes. Of course, you can create, maintain and save your invoices manually. However, as your business grows, doing things manually becomes time and effort-consuming.

We already showcase how a bookkeeping system like Fincent takes much off your plate. And it can offer much more than that. So feel free to dig deeper by booking a demo.