Using Invoices vs. Receipts for Your Home Business
Business has its own language that can sometimes be confusing. For example, many people use the terms marketing and advertising interchangeably, when in fact, they aren't the same thing.
The financial paperwork that comes with running a home business can be similarly confusing, but it’s important to sort through it all. Keeping paperwork updated is a crucial aspect of maintaining accurate records and understanding your financial situation. Two especially important pieces of paperwork are invoices and receipts. Any successful business owner will understand the ins and outs of these documents, including when and how to use them.
An invoice is given to a customer or client before they pay. It's sometimes referred to as a bill. This detailed document itemizes products and services and calculates what they owe you for time, work, and materials. For example, if you’re a graphic designer who created a graphic for a client, you’d invoice them for the time it took you to create the graphic. If you had to buy a photo to include in the graphic, you’d include that in the invoice, too.
As a home business, you might receive an invoice, as well. If you use contractors to help with any aspect of your business, such as a virtual assistant, you can expect to see an invoice from them.
What to Include on an Invoice
To ensure your customer or client is clear about the cost you’re asking them to pay, it's important to be extremely detailed with your invoices. Every invoice should include:
- Your company name and client’s name, along with addresses.
- The date the invoice was created. This is crucial for timely payment.
- Date(s) and description of the products or service provided, including the price of each, and the total quantity ordered.
- Any deposits, prepayments, or any other fee paid upfront.
- Any special rates or bonuses you offered.
- Sales tax, if the transaction involved a tangible item that's subject to a state's sales tax.
- Any penalties or late fees (this is especially important to include on follow-up invoices when the initial invoice isn't paid on time).
- Terms of payment, including method and due date. This aspect should include phrases like “make checks out to…” or “send money through PayPal to…” or "net 30 days,” which means it should be paid within 30 days.
How to Create an Invoice
Many accounting and bookkeeping tools for small businesses make it easy to generate an invoice. The advantage of accounting software is that it can not only create the invoice, but also help you keep track of whether or not it’s been paid. When it's paid, the data can be automatically added to a category of your finances, such as “Accounts Receivable” or “Accounts Paid.” If you don't want to use specialized accounting software, you can most likely find an invoicing template on whatever word processing program you use.
How to Deliver an Invoice
Invoices can be delivered in person, by mail, or through email. You may use email as a default, but then decide to send one by mail to a client or customer that is late in paying. When in doubt, use multiple methods. Getting paid is a crucial aspect of your business, so spare no effort in getting the invoice on the right desk.
Since you know how important it is to get paid, you should strive to immediately pay any invoice you receive. It’s bad business not to honor the contracts you made with others. Even a delay in payment can reflect badly on you and your business.
If you’ve invoiced a client or customer who hasn’t paid, you have several options:
- Send a second invoice with a “due now” notice. Invoices do occasionally get lost, and a missed payment may not be malicious. Sending a reminder may be all that is needed. Make sure that all your invoices are clear about when payment is due.
- Take the client or customer to small claims court. This would only be advisable if you are owed a large amount—going to court is expensive.
- Send the debt to a collection agency. If you’re willing to give up some of the money from the invoice, you can involve a debt collection agency that will work to collect the money in exchange for a percent of the payment.
- Write off the non-payment as a loss on your taxes.
For small bills, writing it off will be the easiest, but if you have a large bill, court or a collection agency can help. And, just in case you're considering it, you shouldn’t continue to work with a client that doesn’t pay.
Receipts are issued once your client or customer has paid their invoice. It’s essentially proof of purchase. If you slip up and accidentally send a second invoice, your customer can use a receipt to prove that they have already paid what they owe you. Along with providing receipts to your clients and customers, you should save any that you receive concerning your business. Your receipts make it easy to calculate your business expense deductions at tax time. If the IRS ever questions any part of your taxes, receipts will help prove that you weren't abusing the tax code.
What to Include on a Receipt
While invoices require specific information by law, there is no standard for what goes on a receipt. What appears on a receipt can vary from business to business. It can be as simple as a handwritten note that says "so-and-so has paid this amount," or as complicated as an invoice. Ideally, it should have information about what was paid for, the date it was paid, and how it was paid (although it shouldn’t have specific payment data such as credit card numbers). Some businesses just re-create the invoice and put "PAID" on it.
How to Create a Receipt
Similar to invoices, there are a variety of ways to create a receipt. If you’re using a bookkeeping program, it can generate a receipt when you log invoice payments. Word processors likely have a template you could use to generate a receipt once you've been paid. As mentioned earlier, it can even be as simple as jotting a note on a piece of paper by hand.
How to Deliver a Receipt
Ideally, receipts should be given immediately upon payment. If one isn’t automatically created and delivered, you want to create it and send it as quickly as possible. Like invoices, they can be given in person, emailed, or mailed. When you deliver a receipt, make sure you mark the payment in whatever accounting system you use.
If you’ve received a receipt for payment on products or services related to your business, file the receipt and mark it in your accounting system. This information will help you stay updated on your financial situation and maximize your tax deductions.