Invoicing - Processes, requirements and software

Contents

• What is an invoice
  • Invoice content requirements
• Forms of invoicing – What do digital invoicing and e-invoicing mean?
  • Digital invoicing
  • E-invoicing
• Sending invoices
• Invoicing software
  • Mobile invoicing
• Project invoicing
  • Benefits of project invoicing
• Invoicing internationally
  • E-invoicing mandates
• Accounts receivable (AR) management
• Payment reconciliation
• Debt collection as part of invoicing

What is an invoice?

An invoice refers to an electronic or paper document summarizing the details of a sales transaction – a description of the sold products, a breakdown of costs, payment information and payment terms – in accordance with the minimum requirements set by the law. An invoice is a crucial document for every business, serving accounting, taxation, and resolving potential issues. In addition to a standard invoice, other types of invoices include credit notes, summary invoices, and pro forma invoices.

For the seller, it is a sales invoice, while for the buyer, it is a purchase invoice. Both sides have their own processes for handling invoices, and there are dedicated systems available for these processes, such as Heeros Sales Invoices and Heeros Purchase Invoices.

Invoice content requirements

The content of an invoice cannot be arbitrary; it is subject to specific regulations. For example, according to the Finnish VAT act (AVL 209 e §), mandatory information on an invoice includes:

1. Date of issuance
2. Sequential identifier
3. Seller's VAT identification number
4. Buyer's VAT identification number (in the case of reverse charge or intra-Community supply of goods)
5. Seller's and buyer's name and address
6. Quantity and type of goods, as well as the scope and type of services
7. Delivery date for goods, performance date for services, or prepayment date if determinable and different from the invoice issuance date
8. Taxable basis by tax rates, unit price exclusive of tax, and any credits and discounts if not included in the unit price
9. Tax rate
10. Amount of tax payable
11. Indication of tax-exempt sales or reference to the relevant provision of the Value Added Tax Act or Directive
12. Note on the buyer's liability for VAT ("reverse charge")
13. Reference to "self-billing" if the buyer issues the invoice
14. Information for the sale of a new means of transport to another Member State to ascertain the conditions referred to in § 26 d (1) and (2)
15. Entries "margin scheme – used goods," "margin scheme – works of art," or "margin scheme – collectors' items and antiques"
16. Note "margin scheme – travel agents"
17. Marking for the sale of taxable investment gold
18. Reference to a previous invoice in the case of a corrected invoice.

The mandatory information on an invoice can be in any language.

Forms of invoicing – What do digital invoicing and e-invoicing mean?

Paper invoicing is dead – except it isn't. Paper invoices are still being processed in surprisingly large quantities. However, it is clear that internationally the trend is moving towards digital invoicing and e-invoicing, especially due to European e-invoicing mandates. But what do these terms actually mean?

Digital invoicing

Digital invoicing refers to all invoicing done digitally. Compared to paper invoices, digital invoices save time and money: they reach the recipient faster, can be processed and tracked more efficiently, and archiving is considerably more effective.

The terminology can be confusing, as depending on the source, digital invoicing may refer exclusively to e-invoicing or also include PDF invoices, which require some manual work.

E-Invoicing

In e-invoicing, the invoice file is in a so-called structured file format. Invoices move entirely digitally between businesses or organizations, from the sending system to the receiving one, almost in real-time. E-invoicing can be done in various formats, with common ones being for example PEPPOL and TEAPPSXML. See our practical guide on e-invoicing. 

Invoicing software

Invoicing software is an essential part of modern invoicing processes. It enables the automation of invoicing, data storage, and tracking from a centralized location. Invoicing software can be part of an enterprise resource planning system, such as Heeros PSA, or it can be a standalone program that integrates with other systems in use. The latter case refers to "best-of-breed" software, which essentially means programs developed to excel at a specific task - such as Heeros Sales Invoices. 

When choosing invoicing software, important factors to consider include the scope of your business and the nature of your invoiced customers. The scope of your business affects how many invoicing features make sense to purchase – the needs of a small company are different from those of an internationally operating conglomerate. Your customer base may also dictate the features of your invoicing software, as, for example, the public sector may require e-invoices. Without e-invoicing capability, you may not be able to invoice government entities.

Mobile invoicing

Invoicing software doesn't always mean just a web-based application or an installed program on a computer. Cloud-based invoicing software can indeed work in a mobile phone's web browser, but many service providers have also developed mobile applications to make invoicing on your phone even more convenient. Not all features may be available in the mobile app, but at the very least, you can efficiently handle the essential invoicing functions on your phone, anytime, anywhere.

Project invoicing

In project invoicing, a company charges its customers for the hours, expenses, and resources utilized in completing a specific project. This invoicing method is particularly common in consulting and service-oriented businesses offering project-based services such as consulting, design, software development, or construction projects.

Project invoicing requires close tracking and effective project management. It is crucial to ensure that it is based on clear agreements and pricing models agreed with customers in advance.

Benefits of project invoicing

For a company, project invoicing enables precise cost tracking, as every hour or resource utilized during the project can be invoiced. This helps to assess the profitability of projects and optimize resource utilization. With a clear understanding of when and how much revenue is expected from each project, financial planning becomes more effective.

Project invoicing also provides an opportunity for additional sales. If a project proceeds as planned, and costs are kept in check, additional income can be generated from potential extra work.

From the customer's perspective, project invoicing allows for close cost monitoring. They know where the money is going during the project, aiding them in keeping track of their budget. In project invoicing, customers also pay based on the progress and results of the project, providing them with confidence that they are receiving value for their money or allowing them to more easily request necessary changes during the project.

Invoicing internationally

Invoicing internationally usually requires meeting specific requirements, including clarity in billing and tax information. An invoice should include the company and customer details (including addresses and VAT/registration number), invoice number, date, due date, payment details, descriptions and quantities of products/services, unit prices, total amount, and any applicable VAT. Countries may also set specific requirements for the content of invoices. Here are some considerations for international invoicing:

1. VAT handling: VAT treatment and rates can vary by country. Some countries may require the company to register as a local taxpayer to correctly charge and report VAT. Ensure that your company understands the tax rules of the destination country and complies with them.

2. Language: Invoicing should be done in the local language or, if needed, in English. This makes receiving and understanding the invoice easier. Additionally, consider potential cultural differences, such as the tone and terms used in invoicing.

3. Delivery and costs: Consider the delivery time and method, as well as any postage costs. E-invoicing is more advanced in some countries than others. However, businesses should consider the need for different invoicing channels in international invoicing– e-invoicing is so much faster and more cost-effective than traditional paper invoicing. Note that e-invoicing requires the adoption of a compatible system.

4. Local practices and requirements: Familiarize yourself with the invoicing practices and requirements of different countries. This can be a labor-intensive task, and sometimes it's impossible to do it solely with your company's internal resources. Companies like Heeros continually monitor changes in the invoicing landscape in both Finland and Europe, ensuring that customers are supported effectively in invoicing. Internationally operating companies need up-to-date information on local laws and regulations when invoicing abroad to comply with them and avoid disruptions in billing or unlawful practices.

In an invoicing software designed to facilitate international invoicing, the following features should be available:

• Ability to create invoices in different languages or with automatic translations.
• Capability to handle different currencies and automatically calculate based on exchange rates.
• Ability to set different tax rates and report VAT correctly.
• Ready-made templates that can be customized according to invoicing needs.
• Ability to send e-invoices directly to customers.
• Capability to generate reports on invoicing status and sales data, for example.

Sometimes invoicing and other financial management tools can become a jungle. Read more about Financial management systems for international companies from our blog post.

E-invoicing mandates

In Europe, many states and tax authorities have started to view e-invoicing as a means to increase transparency in the economic situation, reduce tax evasion, and promote digitalization. To truly implement e-invoicing, the most effective approach is to make e-invoicing mandatory. These laws are referred to as e-invoicing mandates.

Several countries have already announced the preparation of B2B e-invoicing mandates or are considering them. If a company is not prepared for the various requirements, it is likely that there will be issues in invoicing right from the sending stage, causing unnecessary delays in business operations. Companies operating in Europe should keep track of the progress of e-invoicing requirements. You can easily see the countries and the situation on a map and a listing that we keep up-to-date on our website. Check also out our Practical guide on preparing for e-invoicing regulations.

Accounts receivable (AR) management

Accounts Receivable (AR) management is a crucial aspect of the invoicing process that oversees a company's outstanding receivables and customer invoices. It involves the recording of all sales, invoicing activities, customer payments, and associated financial transactions.

The process begins by creating individual customer profiles in the system. Each customer account includes essential information such as the customer's name, address, contact details, and, if applicable, their tax identification number. This information ensures accurate invoicing and effective communication.

Upon completing a sale, the company generates an invoice for the customer, detailing the products or services sold, unit prices, quantities, applicable discounts, VAT (value-added tax), and the total amount. For a comprehensive understanding of an invoice's contents, please refer to the section discussing the details of an invoice. As customers make payments for these invoices, the corresponding transactions are recorded in the accounts receivable system. At this stage, the invoice is marked as "paid," and the invoiced amount is subtracted from the outstanding receivables. Payment methods can include bank transfers or electronic payments.

Unsettled invoices are considered outstanding receivables. Through effective accounts receivable management, a company can monitor which invoices remain unpaid and the total expected revenue. This helps in maintaining liquidity and strategically planning financial activities. In cases where invoices surpass their due dates without payment, companies can initiate collection processes. Initial steps may involve sending payment reminders, and if necessary, engaging a collection agency for further action. The accounts receivable system efficiently tracks these actions, ensuring timely payments from customers with outstanding invoices.

Additionally, the accounts receivable system facilitates the generation of various reports, offering insights into sales patterns, outstanding receivables, payment trends, and the effectiveness of collection efforts. These reports empower companies to comprehend sales dynamics, manage cash flows, and make informed decisions for future planning.

Similar to the overarching invoicing process, digitizing and automating accounts receivable management through software enhances efficiency, allowing more time for financial forecasting and strategic management support

Debt collection as part of invoicing

Debt collection is the process of seeking payment for unpaid invoices by collecting them from the customer or through an external debt collection agency. It is a crucial component of the invoicing process with the aim of ensuring that the company receives its earned revenue on time.

The debt collection process often involves different stages. Initially, payment reminders are sent to the customer if the invoice remains unpaid by the due date. If the customer does not respond to payment reminders, debt collection actions may be taken, including debt collection letters, phone calls, or emails. Using an external debt collection agency is also an option. Debt collection agencies specialize in debt recovery processes and can handle situations where the customer does not respond to the company's internal debt collection efforts, and they can assist with legal actions if necessary.

While debt collection situations can be challenging, it is important to understand that the customer relationship does not necessarily end with debt collection. Often, non-payment can be due to temporary financial difficulties or misunderstandings. Therefore, it is advisable to continue communication with the customer and attempt to resolve the issues amicably so that the customer does not form a negative perception of the company.