Many businesses struggle to collect payments from customers promptly, and these cash shortages can have serious consequences. The secret to faster payment collection all lies in the invoice: Sending invoices quickly, making them easy to pay, and being consistent on your follow-up are all key to collecting faster.
In this guide, we’ll teach you how to write an invoice and uncover all the best practices for invoicing, including how to use invoicing software to handle much of the work automatically. FreshBooks, who is the sponsor of this article, is easily the best-regarded invoicing solution on the SMB market. You can try out their award-winning software free by clicking the link below:
What Is An Invoice & What Info Should Be Included
An invoice represents a request for payment of the goods and services that your customers have already received. You should create an invoice & send it to your customer soon after you have fulfilled your end of the agreement.
Below, is a sample invoice that we created in FreshBooks for our fictitious company, Paul’s Plumbing. At a minimum, an invoice should include your company contact info (i.e. address, phone number), your customer’s contact info and the details of the product/service that was purchased such as quantity and cost along with the due date. Later in this article, we will walk you through the steps to create an invoice in FreshBooks.
5 Steps to Better Customer Invoicing & Payment Collection Process
You must implement a process that starts with the sale and ends with collecting payment from your customers. Otherwise, you will find yourself with a large accounts receivable balance (money your customers owe to you) but little-to-no cash inflow.
Here’s the 5 steps to manage invoices and get paid faster:
Step 1- Create the Invoice in a Timely Manner
Create the invoice within 1-2 business days after you have provided services or shipped the products to your customer. The longer you wait to send the invoice, the longer you will have to wait to receive payment. Tip: If you require a deposit from your customer before you begin the work, be sure to reduce the invoice by the payment you received upfront. You can also create an invoice to request an upfront deposit or retainer.
Step 2 – Email Invoices (Do Not Mail Invoices!)
As I mentioned in step 1, the faster your customer receives the invoice, the sooner you can get paid. Don’t waste time sending invoices through the mail; instead just email the invoice to your customer. Accounting software like FreshBooks allows you to see if the invoice has been opened, so there’s no worrying if the invoice was lost.
Step 3 – Allow Customers to Pay Invoices Online
With today’s technology, we can pay for anything in seconds with just a tap of a smartphone or smartwatch. Why not make it just as easy for your customers? Using invoicing software like Freshbooks, you can give customers the option to pay with their credit card (or Visa debit card); saving them time from writing and mailing a check and saving you the hassle of waiting for a check, then heading to the bank to make a deposit.
Step 4 – Send Regular Reminders
Most accounting software like FreshBooks will allow you to send automatic reminders to customers, along with a copy of the open invoice. Whether you use FreshBooks or your Gmail calendar, I recommend that you create the following 3 types of reminders:
- 1-2 Days Before the Invoice Comes Due. This is a proactive approach to alert your customer that their payment due date is approaching.
- 1-2 Days After the Invoice Due Date. This is a friendly reminder to your customer that the due date has passed and payment is now due.
- 7 Days After the Due Date. If you have not received payment 1 week after the due date it is time to give your customer a call. Depending on how many past due invoices you have, plan to set aside at least one hour each week to make these follow-up calls. While they are not fun, you must keep the lines of communication open between you and your customer in order for you to get paid; once your customer starts avoiding you, the likelihood of you getting paid will diminish.
Step 5 – Review your A/R Aging & Follow-up
On a weekly basis, you should review your accounts receivable aging report and make a list of the customers who you need to call to request payment. Below is a sample Accounts Aging report that we ran for our fictitious business, Paul’s Plumbing.
The above report shows all of the past due invoices as of November 3, 2017. Below is a brief explanation of each column.
1-30 Days: Invoices in this group are 1-30 days past their due dates. Once the invoice reaches the 7 Days past due, you should be calling weekly to follow-up on payment.
31-60 Days: Invoices in this group are 31-60 days past their due dates. All of these invoices should be on your weekly call list. Once an invoice reaches that 60 day mark, you should strongly consider not accepting any additional orders from the customer or revoking credit privileges and putting them on C.O.D. (cash only delivery) until their account has been paid in full.
61-90 Days: Invoices in this group are 61-90 days past their due dates. By now, if your customer has not set up a payment plan with you or provided a date that payment will be made in full, you need to probably take the next step and seek legal action.
Over 90 Days: Any invoices that reach 90+ days should be sent to a collection agency. More than likely invoices that are over 90 days old will have to be written off the books as bad debt. The goods news is that bad debt expense is tax deductible, yay!
In addition to setting up regular calls and sending letters regarding past due invoices, you could also start adding interest on top of the outstanding amount due. FreshBooks allows you to automatically apply late charges to past due invoices.
Adding late charges/fees will let your customer know how serious you are about getting paid and it may motivate them to send in that check. You can always “waive” the fees once payment is received.
3 Common Methods Used to Create Invoices
Most small businesses create invoices using an accounting software like FreshBooks, a word processing program like Microsoft Word or a spreadsheet program like Microsoft Excel.
Creating Invoices in Word
If you don’t have access to Excel or Google Sheets and you create just a handful of invoices each month (5 or fewer), Microsoft Word is probably the most economical solution for you.
To use a Microsoft Word invoice template, simply open Word and click “New Document.” This will bring you to an online database where you can choose from hundreds of different templates.
Here are some of the pros and cons to creating invoices using Word:
- Access to over 200 templates in the Microsoft library so that you don’t have to start from scratch.
- Flexibility to customize any template from color and design to adding your company logo to fit your brand.
- It is a very manual and tedious process that will require a lot of time.
- Unlike Excel, you cannot create formulas to calculate discounts or sales tax; you will have to do these calculations manually which increases the likelihood of an error.
Creating Invoices in Excel
Excel is another popular option for businesses who just have a handful of customers and who want to learn how to write an invoice. The process is similar to Word, except you can typically find templates that will automatically calculate totals.
For example, our Excel invoice template will automatically add discounts, taxes and subtotals to calculate your invoice amount.
Here are some of the pros and cons to creating invoices using Excel:
- You can create formulas to calculate discounts, subtotals and sales tax.
- Similar to Word, you have access to more than 200 templates in the Microsoft library so that you don’t have to start from scratch.
- It is a manual process that will definitely require you to invest some time to set up.
- You must have a good understanding of how to create formulas in Excel; otherwise, your calculations will be incorrect.
Creating Invoices with Accounting Software
Once you’re sending more than a couple invoices per month, an accounting software program like FreshBooks often becomes the best solution. For one, it’s easier and faster to create invoices. But perhaps more importantly, features like online payments and automatic reminders help you to actually get paid faster.
To try Freshbooks for free, you can follow this link, or follow our step-by-step instructions in the next section.
- Fully customizable; just add your company logo, color scheme and font of your choice.
- Automatically calculates invoice totals for you; including applicable discounts and sales tax; no manual calculations required.
- Accept online payments from customers.
- Run an A/R Aging report in FreshBooks to see what invoices are due or coming due.
- When sent via FreshBooks, you can keep track of when the invoice has been viewed and/or paid by your customer.
- You are able to create automatic reminders to customers when an invoice is coming due or past due.
- FreshBooks can automatically send invoices to customers you need to invoice on a weekly, monthly or quarterly basis.
- You can create an invoice to request an upfront deposit (or retainer) from your customer before you begin the work.
- Set up recurring payments for those customers who typically pay the same amount on a weekly, monthly or quarterly payment schedule.
- FreshBooks only comes with two templates vs. the 200 templates you have to choose from with Microsoft Excel and Word.
- Like most accounting software, you will have to pay a monthly subscription fee to use FreshBooks. However, unlike Microsoft Excel & Word, you can do a lot more with FreshBooks than just create invoices. You can manage all of your income and expenses in FreshBooks and create key financial statements like a Profit & Loss Statement.
How to Set Up FreshBooks
Since invoicing software is often the best solution for small businesses who want to write an invoice, we’re next going to hop into one of the top programs— FreshBooks— to show you how it works. To follow along with your own account, sign up here for a free 30-day trial of FreshBooks.
Before you can create invoices in FreshBooks, you must first enter some basic info about your business. This literally takes all of 3 minutes and then you are good to go!
Step 1 – Enter Basic Company Info
In the screenshot below, we have entered the business owner’s name, the name of the business, complete address and whether or not the business is a Corporation/LLC. Once you have completed these fields, click the “Save and Continue” button.
Step 2 – Select your Industry.
In the next screen, choose the industry that your business falls into.
That’s it! We are ready to create invoices.
How to Create Invoices with FreshBooks
Follow the steps below to create an invoice in FreshBooks:
Step 1 – Customize Your Invoice Template
Before we create an invoice, we want to select a template and customize it as indicated in the screenshot below.
- Choose a Template: FreshBooks has two templates that you can choose from; Simple or Modern. Click the arrow as indicated above to toggle between them and select the template you want.
- Add Your Logo: Upload your company logo, if you have one. If you don’t have a logo, check out our article on best logo design software.
- Select a Theme Color: Select a color scheme for your invoice templates.
- Select a Font: Click the dropdown to choose from a couple of Font options.
- Save: Once you have made your selections, be sure to save them.
Step 2 – Click “Create New” then “Invoice”
From the Dashboard, click on the “Create New” button and select Invoice as indicated in the screenshot below.
Step 3 – Complete Invoice Fields
Below is a sample invoice template that will display along with a brief explanation of each field that you need to complete.
- Your contact info: This info will automatically populate from the basic company info that you entered when you set up FreshBooks. We will cover this later on in this article. Tip: It’s important that your customer has this info at their fingertips so that they can cut your check and/or give you a quick call if they have a question regarding their invoice.
- Billed To: Your customers’ contact info belongs in this field. If you have not set the customer up in FreshBooks, you can enter the customer’s info directly in this field. Tip: If you prefer to send your invoices via snail mail, be sure to include a contact person’s name in this section; especially if it is a large company.
- Date of Issue: This field will automatically populate with the date you create the invoice. However, you can change the date if you need to.
- Invoice Number: The invoice number is a unique number that FreshBooks will generate; you will not be able to change this number.
- Amount Due: FreshBooks will automatically calculate the total amount of the invoice as you enter the products/services in the Description section.
- Description: Enter a detailed description of the service/products you are billing for in this field.
- Rate: Enter the billing rate for the service/product that you are billing for in this field.
- Quantity: Enter the quantity of products our the hours for services that you are billing for in this field.
- Line Total: FreshBooks will multiply the rate times the quantity and calculate this field for you.
- Discount: If you would like to apply a discount to the invoice, just enter the discount percent in this field and FreshBooks will calculate the discount for you.
- Tax: If you need to apply sales tax, enter the sales tax rate in this field and FreshBooks will automatically calculate sales tax for you.
- Amount Due: FreshBooks will add the Subtotal, Discount & Sales Tax fields together, subtract any down payments (or deposits) to calculate the total amount due.
- Notes: You can enter a personal note to your customers or a friendly reminder that they can make their payments online as we have done in this example.
- Terms: Feel free to include a friendly reminder to your customers to pay their invoices by the due date. Tip: This would also be a great place to remind customers that late fees/penalties will be assessed if the invoice is not paid on time.
How to Send Invoices via Email with FreshBooks
As we have discussed, you should email your invoices; the sooner your customer receives the invoice, the sooner you get paid.
Follow the steps below to send your invoices via email in FreshBooks.
Step 1 – Click On The Invoice
If you don’t have your invoice open, navigate to the Dashboard and click on the invoice to display it on your screen. Click the “Send” button as indicated in the screenshot below.
Step 2 – Complete Email Details & Send
In the next screen, you need to provide some additional information. Below is a snapshot of the fields along with a brief explanation of each.
- Email Address: Type the email address that you would like to send the invoice to. You can enter multiple email addresses if you need to.
- Subject: This field is created by FreshBooks and cannot be changed.
- Body of Email: FreshBooks generates part of the email message that you see here; however you can also type in a personalized message as we have done here with “We appreciate your business!”.
- Create a shareable Link: In addition to sending the invoice via email, you can also create a link to the invoice by clicking “create a shareable link”.
- Send Invoice: Once you are done, click this button to send the email to your customer.
How to Accept Online Payments with FreshBooks
As we discussed previously, it’s important to provide your customers with the option to pay their invoices online. It will save them time because they can do it quicker than sending you a check.
Follow the steps below to turn on the online payments feature in FreshBooks.
Step 1 – Click on The Invoice
If you don’t have your invoice open, navigate to the Dashboard and click on the invoice to display it on your screen. To the right of the invoice, you will see a list of Settings. Click on “Accept Credit Cards” as indicated in the screenshot below.
Step 2 – Review & Accept Credit Card Terms & Fees
In the next screen, you will see a list of credit cards that you can accept along with the fee that will be charged for each transaction. Click the “Accept Credit Cards” button to accept the terms and activate online payments for your customers.
Step 3 – Verify Online Payments is Active
Now when your customers receive their invoices, they will see the following “Pay Now” button at the very top of the invoice. All they have to do is follow the on-screen prompts to pay their invoices in just a few minutes!
Tip: Once your customer pays an invoice, the following will take place in FreshBooks:
- The invoice will be marked as paid and your A/R balance will automatically be reduced.
- You will receive an email notification that the invoice has been paid.
- Payment should hit your bank account within 2-3 business days.
How to Setup Reminders & Run the Accounts Aging Report in FreshBooks
You are able to send up to three late payment reminders & you can also apply late payment fees with FreshBooks. However, you must subscribe to FreshBooks Pro to have access to this feature. To set it up, you simply display an invoice, click on the Settings which is located to the right of the invoice and select Send Reminders. The following window will display:
Select the number of days (before or after) you would like the reminder to go out to your customer. Based on our discussion around reminders in the how to set up an end to end process section, I suggest you set up the following 3 reminders:
- 2 Days Before Due Date
- 2 Days After Due Date
- 7 Days After Due Date
Run the Accounts Aging Report
As we have discussed, the best way to manage your outstanding invoices is to review your A/R Aging report at least once a week.
Follow the steps below to run the Accounts Aging Report (A/R Aging) in FreshBooks:
Step 1 – Navigate to Advanced Reports.
From the Dashboard, scroll down to the Advanced Report section and click on the “Accounts Aging” button as indicated in the screenshot below.
Step 2 – Review the Accounts Aging Report.
Below is a snapshot of the Accounts Aging report (aka A/R Aging report) that we ran for our sample company, Paul’s Plumbing.
As of November 3, 2017, there are two customers that have outstanding invoices that are overdue 1-30 days. You can print this report, export it to Excel or send it to anyone via email.
The Bottom Line
To recap, you now have a better understanding of what information your invoice should include, how to implement a process that starts with invoicing for your sales/services and ends with collecting payment from customers in a timely manner which will improve your cash flow.
We recommend using an accounting software like FreshBooks because it can help you not only send professional-looking invoices to your customers but save you time so that you can get back to what you enjoy doing most, growing your business!