An Introduction to Invoicing for SMEs & Freelancers

SMEs Advice 18 April 2023
An Introduction to Invoicing for SMEs & Freelancers

Ever heard the phrase, “do what you love, and you’ll never work a day in your life”? A nice notion, but not exactly accurate. Yes, it’s wonderful to have an enjoyable career that genuinely fulfils you, but it doesn’t change the fact that you work for a reason: to be paid. 

If you’re a founder of a startup or SME, or recently made the move to freelancing, you’ll be well-versed on the importance of invoicing, and implementing a cash flow process that sustains your venture.

A strong invoicing structure helps build business security, and protects you (and your team or partners) during quieter periods. So if you’re new to managing your own finances, or want to become better equipped, our introduction to invoicing is here to help you get started.

Creating an invoice

Much like contracts, SoWs, employment forms or any other business admin, creating an invoice for the first time can seem like one of those daunting, complex tasks only trained accountants can do. On the contrary, creating an invoice is relatively straight-forward, regardless of the type you need to produce.

The number one rule is to include a unique number and/or reference in all of your invoices, and ensure these aren’t replicated across any other invoice you create. Invoice numbers will be used to properly account for your funds, complete bookkeeping, handle disputes, and much more.

Standard Invoice

If you’re charging for your products or services, there’s rarely a need to issue something more than a standard invoice.

This will include your details or those of your business, such as name, address, and email or phone number. It will also then include the same for the individual or business you’re invoicing.

It’s always best practice to detail the work or products you’ve supplied (and quantity if relevant) for clarity, and the invoice number. These will usually match the contract or SoW your client has signed.

From there, all you need to include is your fee, payment deadline, and bank details. Simple. Effective. Easy to fulfil again and again.

Proforma Invoice

Unlike a standard invoice, a proforma invoice is to provide a formal confirmation to your clients for goods or services, and is issued before those goods or services have actually been supplied.

Usually, a proforma invoice is used when you either haven’t worked with a client before, and you therefore need to reinforce your business authenticity, or you have another reason to request payment prior to completion of work.

The information included in a proforma typically mimics that of a standard invoice, including the unique invoice number you’ll use for the transaction.

Once payment has been made, you’ll usually issue a VAT invoice. It’s worth noting that a proforma can’t be used in your accounting or bookkeeping, meaning you’ll still need to issue an invoice and log this in your system for accurate record keeping (more on this below). 

Commercial Invoice

Most typically used in overseas shipments, a commercial invoice is a document that enables your products to pass customs.

In almost all cases, a commercial invoice is entirely managed by the exporter of the products, and will include detailed information about the goods being shipped. This includes their value, insurance costs, contents, weight, country of origin and more.

A commercial invoice is typically a physical document included in the shipment, but in some countries, it is permissible to submit Electronic Trade Documents (ETD) in lieu or upload your commercial invoice instead.

If you’re issuing an invoice to an overseas customer or client, you may need to include some additional information to enable them to process payment. This is typically dependent on region and individual business requirements, but could include the IBAN and/or SWIFT code.

IBAN, SWIFT and BIC are foundational to business invoicing, so you may wish to familiarise yourself with these codes.

Issuing an invoice

Getting an invoice into your client’s hands is very simple – and you still have a few options open to you.

  1. Submit the invoice yourself. This is typically done via email to your point of contact, and is a simple way of submitting a PDF or Word document with all the relevant information.
  2. Have an accountant manage invoicing. If you outsource your accounting and bookkeeping, you can always request that your accountant handles all invoicing on behalf of you or your business.
  3. Invest in an invoicing system. There’s a range of options out there, but you can always invest in a software which will automatically create and issue your invoices for you, and even send reminders if payment is late.

It’s worth talking this through with your client, too. Depending on their own system, the size of their business, and other financial requirements, they might require a formalised copy (PDF or Word doc.) of the invoice with your address and/or other details to process it.

Chasing an invoice

Having outstanding invoices can be a real cause of frustration and anxiety, particularly if you’re in the process of building business and job security. But there are a number of steps you can take to address the situation:

  1. Speak with your client. It sounds obvious, but delays can be a result of simple mistakes or an oversight, so pick up the phone and see if it’s a matter of a quick fix. This also gives you the chance to establish a better process for the future - like sending invoices directly to an accounts team or issuing them earlier in the month.
  2. Consider a statutory demand. SMEs and freelancers alike have the right to serve clients with what’s known as a 'statutory demand'. It’s a simple but formal way of declaring unpaid debt (that’s undisputed), and demonstrates that you’re prepared to take the matter further if need be. There’s a strict process involved, so be sure you’re in the know.
  3. Charge late fees. Charging late fees for unpaid invoices is another suitable way  to recover money, and can be used by SMEs or freelancers. This is known as HMRC's 'statutory interest' and is typically 8% plus the Bank of England base rate for business to business transactions.
  4. Small claims court. Taking your client to small claims court could be an option for you if you're still unable to recover payment, however, it’s worth noting that this can often come with a good deal of work and cost to you. So if your unpaid invoice is for a more modest amount, it may not be a worthwhile option.

Recording an invoice

Keeping a thorough and accurate record of your invoices is going to become increasingly important as your business grows, or you gain more clients as a freelancer. It’ll help you better track your revenue over time, settle potential disputes, and have a paper trail to handover should you be audited by HMRC in the future.

If you’re issuing the invoice yourself, or it’s coming from a member of your team, you’ll need to log this in your bookkeeping system as soon as it’s sent. 

Include the invoice number and/or reference, the same description used in the invoice, and the amount to keep your records accurate and easy to refer back to if need be. When you receive a payment, you’ll have a corresponding invoice to log this to so that your bookkeeping is precise, and all your business funds are accounted for.

If you outsource your invoicing, a good accountant will complete all of this for you, and query any missing funds or underpayments if necessary.

Read more: How To Spot Fake Business Invoices & Payment Requests


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