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Our thoughts & tips on small businesses, freelancers and sole traders

Proforma Invoice & Other Types of Invoices

Written by on February 13, 2017

We’ve already discussed before what an invoice is and how you can create one using Word & Excel invoicing templates.

However, those were for general, everyday invoices. There are in fact many different types of invoices out there, and your business may require ones that are more specific.

Invoices are crucial not only for keeping your cash flow positive. It’s also important that you have the correct invoices to help your business work effectively.

Mistakes in your invoicing can lead to delays in payment for your invoices, which will not just negatively affect your cash flow but may also impact the way your customers view your business.

The most popular of these are the proforma invoice and commercial invoice. However, there are 8 more types of invoices that are commonly used by small businesses in their everyday business practices.

We’ll look at these in greater detail to help you discover which invoices you need and how to create them.

Proforma invoice

The most popular type of non-standard invoice is the proforma invoice. This is a document normally used in international trade, including for goods that will not be bought or sold, such as gifts.

The document can actually be seen as a pre-invoice: it is a commitment from the vendor or seller to provide specific goods to the buyer at specified prices and agreed-upon terms. However, like a price quote, the terms of sale may change.

This is used to declare the value of a trade.

Because it is not used for recording accounts receivable or accounts payable for the seller and buyer, it is not a true invoice. It is much closer to a confirmed, agreed-upon purchase order instead.

Proforma invoices are used to provide documentation for customs to show the value of goods that you still need to deliver.

It can also be used by sellers for new customers, stating that only after the amount is paid will the goods/services be delivered.

In either case, no VAT is included in the proforma invoice. After the goods or services have been delivered, a VAT invoice or standard invoice (a near-duplicate of the proforma) should be sent to the customer.

Proforma invoices are some of the most popular types of invoicese

Commercial invoice

A commercial invoice is a document used for customs in the sales of goods exported across international borders.

The document is required to show the true value of the imported goods and to assess the correct duties and taxes to be applied to the items.

A commercial invoice is therefore similar to a proforma invoice, except for the fact that a proforma invoice is not a finalized document. In customs, you may present a proforma invoice if a commercial invoice is not available. However, both invoices are not needed.

Although there is no set format internationally, there are a few standards that must be met. Any commercial invoice should include:

  • the names of the buyer and seller involved in the shipping transaction
  • the goods that are being transported
  • the country where the goods are manufactured
  • the Harmonized System codes for those goods

The last one, the Harmonized System, is an international standardized system that’s used to classify products traded across borders. The code is made up of 6 digits that describe in descending hierarchy what the exact product is.

An example of the hierarchy structure of the Harmonized System
An example of the hierarchy structure of the Harmonized System. Image source

Although commercial invoices have lots of details that invoices require, it is not normally used for payment in European countries. In those situations, a standard tax or VAT invoice, where applicable, should be used.

The commercial invoice is a necessary document for shipping across borders

Credit note (or credit memo)

This type of document is also sent by the seller to the buyer. It is used in case the buyer returned the goods or the goods were not properly delivered to the buyer. This could be in the normal situations of damaged goods or a mistake that the seller made in the order.

The credit note will then be for the same or lower amount of the original invoice. The seller can refund the money or provide credit on a future purchase.

In this way, you can consider a credit note as the opposite of an invoice. Instead of the seller informing the buyer that the buyer has to provide payment, the seller is informing the buyer that the seller has to provide payment.

Some of the most common reasons for providing the buyer a credit note are:

  • the goods were damaged in transit
  • the goods or services did not meet the buyer’s quality standards
  • the seller charged an amount higher than agreed
  • the correct discount rate was not applied

A credit note can be seen as the opposite of an invoice

Debit memo

A debit memo is, as is obvious, the opposite of a credit memo. Instead of any failure or lack of quality on the seller’s side, the debit memo comes about because the customer fell short in some way.

This could be due to not paying the invoice or not paying it in full (where the latter could be an error made by the seller). The debit memo is sent out to balance the original invoice amount plus additional late fees.

It can be seen as a follow-up invoice.

The use of a debit memo is not very common, seeing as most companies simply resend the original invoice with the late fee added on. They may also send another invoice only for the late fee.

Although not very common in invoicing, debit memos are more often used in the banking sector.

A debit memo is used to get payment from a customer who underpaid or paid too late

Timesheet invoice

A timesheet invoice is one that’s created for those people who work on an hourly basis. It lets you record your hourly work directly on the invoice and request payment from your customer.

Because the time you are billing for is right on the invoice, it helps your customer easily know when and how long you worked on a particular project or task.

In that way, timesheet invoices actually are a combination of both the timesheet and invoice and helps expedite the processing and payment of the invoice.

In order to create a timesheet invoice, you’ll need the following parts:

  • your name, title, and start date (and any other applicable IDs)
  • the dates and times of work each day
  • the total of the hours, the hourly rate and the total amount owed
  • any notes to the customer, including payment terms and other details

The timesheet invoice is for hourly work payments

Self-billing invoice

In self-billing invoicing, a buyer actually ends up issuing an invoice to him or herself. Instead of having to wait for the seller to create an invoice, receiving it as an account payable and then finally paying the seller, the buyer does it all himself.

He receives the goods or services and then creates the invoices and issues it to the accounts payable department. He also sends the invoice to the seller along with the payment. This way, the payment process happens much more quickly than having to wait on the seller to issue the invoice.

Although self-billing is less common around the world, it is gaining ground.

In the UK, in order to arrange self-billing, both the supplier and customer must be VAT registered.

In order to have a self-billing arrangement, the supplier and customer must first sign a formal self-billing agreement.

This agreement should include the following:

  • the supplier’s agreement that the customer can issue invoices on behalf of the supplier
  • the supplier’s confirmation that another VAT invoice won’t be issued
  • an expiration date for the agreement, usually for a length of 12 months
  • an agreement by the supplier that they will inform the customer if there are any changes in their VAT status
  • details of a third party that will be involved in the self-billing process, if applicable

This arrangement can be made between the UK and EU and non-EU countries. However, it is possible and often likely that each EU country may have their own regulations for self-billing. Therefore, it is important that you review the specific country’s self-billing rules to make sure you comply.

The self-billing invoice is great for saving time and money

Statement

A statement can often be confused for a standard invoice. When a seller sends an invoice to a customer, the document usually itemizes the invoices that the customer have not paid yet.

It can also include any partial payments that the customer has made. However, a statement is not an invoice. Where an invoice is a request for payment from the customer, a statement is more like a reminder of what still needs to be paid.

Because statements list past unpaid invoices, or only partially paid ones, they usually include less detailed information for each invoice.

Statements also differ from standard invoices in that they are sent to the customer at regular intervals. Normally, this is once a month on roughly the same day. Invoices, on the other hand, are usually sent out immediately after or with the product or service.

To the customer, an invoice requires an accounting transaction and goes to account payable. The statement does not require any accounting, and is just an informational document.

Customers should not pay items listed on a statement, with one notable exception. Credit card companies will send monthly statements that are actually invoices. They have to be paid by a certain date or else penalties will be added.

A statement is not an invoice but an informational document about past unpaid invoices

Progress invoicing (billing)

When the seller is working on a major project that takes months or years to complete, he can send a series of invoices at different stages of the project.

These are issued by the seller to the customer in order to receive payment for the parts of the project that have been completed up to that point.

On the progress invoice (bill), the seller will state the original contract amount and any changes to that amount that have already been approved by the customer.

On the progress invoice, the seller will also show:

  • how much has been paid to date by the customer
  • what percentage of the project has been completed
  • the amount currently due
  • the total amount remaining for the entire project

This is especially applicable for construction industries, where projects are long-term and delays and increases in costs are common.

In these situations, the customer is not willing to provide payment for the entire project upfront. On the other hand, construction companies do not want to wait until the project is completed to be paid, which can take up to many years. This would negatively affect cash flow and push many construction businesses into bankruptcy.

Progress invoicing (billing) then helps alleviate this issue. The customer pays these invoices at several stages during the project. The completion of each stage is verified in some form or another and the money is issued to the construction company.

The progress invoice is necessary for long-term projects

Recurring invoicing

Recurring invoicing can be a fantastic way for a seller to send invoices to a customer for regular charges at regular intervals.

This is largely a matter of convenience for both parties: the seller does not have to create an invoice from scratch for each cycle. The customer, on the other hand, can be certain from the outset (based on a contract or other agreement with the seller) that the amount will be the same at the same time.

This is the case with software subscriptions or membership fees that are always the same each month.

The amounts may also be different but billed at the same time. This is especially true for cable, phone and utility bills.

Recurring invoicing also allows for the seller to get permission from the customer to apply automatic charges. In fact, for most software, magazine or other subscriptions with monthly fees, the customer’s permission to be charged automatically is a requirement.

Although the convenience factor is great for recurring invoicing, there are some potential drawbacks.

Most importantly, error correction is much more difficult with recurring invoicing than standard invoicing. For example, when a customer receives an invoicing that contains an error, he can notify the seller and refuse to pay the invoice until the seller corrects it and submits a new invoice.

For recurring invoice, the charge is automatically applied, even if there is an error in the invoicing. The customer will then have to get a refund for the charge that was automatically taken and the process is much longer and requires more involvement from both sides.

For this reason, recurring invoice is usually best for amounts that are the same each month. That way, there are no surprises and no reasons for refunds or other challenges to the invoice.

A recurring invoice is good for regular payments on regular dates

E-invoicing

Electronic invoicing is an invoicing trend that is steadily growing. It is a the exchange of invoices between the seller and buyer in electronic format.

This is beneficial in a few ways.

First of all, the amount of time saved from using electronic invoices is great. In traditional, paper-based invoicing, invoices would have to be sent to the customer by post (snail mail). This would take anything from a few days to a few weeks, and the invoices may miss the billing cycle.

Electronic invoicing allows for the buyer to receive the invoice as soon as the invoice is created and sent.

The other benefit is also the amount of money that is saved. Paper-based invoicing requires manual labor that is always prone to human error. This error leads to increased costs and delayed processing cycles as companies work to fix these errors.

Many B2B business are already using e-invoicing for many years. However, there are many that are wrongly using invoices as e-invoices.

An e-invoice has structured invoice data in XML or Electronic Data Interchange (EDI) formats, or data structured using Internet-based web forms.

Paper invoices that are sent by fax and scanned paper invoices are not truly e-invoices.

In fact, the true definition of an e-invoice is that its data should be structured in such a way that the data can be integrated into the customer’s account payable system without any extra input.

E-invoicing is a great process for saving time and money on invoices

The most important invoices

These are only some of the many varieties of invoices that there are in the business world, the most popular being the proforma invoice and commercial invoice.

However, these are the major ones that you may encounter in your small business journey.

While one business generally needs to use just one type of invoice, there may be times in the future or in certain business changes that will require a small business to use a different type of invoice.

In these situations, it is best to know what the purpose of the invoice is and how to structure the invoice. That way, you will be compliant not only with your customer’s accounts payable, but also with any regulations that cover that particular type of invoice.

To really get a grip on the invoices, check out our infographic below:

Check out what proforma invoice and other types of invoices are in our infographic

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