Accounts Receivable Invoice – Definition, Types, and More

Did you know the number one reason why most of the small businesses (82% to be exact) fail is cash flow issues? A considerable percentage of these cash flow issues stem from a failure to track accounts receivables accurately.

When you’re a business owner or finance executive, this means if you’re not managing your accounts receivable invoices effectively, you could be jeopardizing your financial health. Inaccurate tracking can lead to missed payments and impact your bottom line. Understanding AR invoices and their types and how you can create them is thus important to streamline your business’s billing process and improve cash flow. Read along for a thorough understanding. 

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What’s an accounts receivable invoice?

An accounts receivable invoice is a document you send to a customer requesting payment for goods or services provided on credit. This invoice serves as a formal record of the transaction and outlines essential details such as the amount owed, payment terms, and due dates. Once you send an AR invoice, it gets recorded as an asset on your balance sheet, representing money you’ll receive in the future.

Wondering what are some key parts of an AR invoice? Let’s explore that. 

Key components of an AR invoice

Here are all the key components your AR invoice can typically have or basically, what you need to include in your AR invoice template:  

• Invoice number: A unique identifier for each invoice, which helps you track and reference it.
• Invoice date: The date when you issue the invoice.
• Invoice due Date: The date by which payment must be received.
• Customer information: Name, address, and contact details of the customer.
• Your business information: Your company name, address, and contact information.
• Description of goods or services: A clear description of what you are billing for.
• Total amount due: The total amount the customer owes, including any taxes or additional fees.
• Payment terms: Conditions under which payment should be made (e.g., net 30 days).
• Payment options: Methods available for payment (e.g., credit card, bank transfer).

Although these are all parts of an AR invoice, not all of these invoices are the same. There are different types of AR invoices which we’ll explore now.

Types of AR invoices

There are six main types of AR invoices: 

1. Invoice

The standard document requesting payment for goods or services provided. This is what most people think of when they hear “invoice.” For example, if you run a graphic design business and complete a logo design for a client, you would send them an invoice detailing the services rendered and the amount due.

2. Credit memo

Credit memo is issued when a customer returns goods or when you need to adjust the original invoice amount downward. This document reduces the amount owed by the customer. For instance, if a customer returns a defective product, you would issue a credit memo to reduce their outstanding balance by the amount of the returned item.

3. Chargeback

A reversal of a transaction initiated by the customer’s bank, often due to disputes over goods or services. Chargebacks can negatively impact your cash flow. So, for example, if one of our customers claims they did not receive their order and disputes the charge with their bank, you might get a chargeback that negatively impacts your cash flow.

4. Debit memo

Used to increase the amount owed by a customer, typically due to additional charges that were not included in the original invoice. In cases where you provided extra consulting hours beyond what was initially agreed upon, you’d issue a debit memo to reflect this additional charge.

5. Guarantee

A document ensuring payment for goods or services under certain conditions. This might be used in contracts where future payments are contingent on specific criteria being met such as in a construction contract, you might include a guarantee stating that payment will be made once specific milestones are achieved, providing security for both parties.

6. Deposit invoice

An invoice requesting partial payment before delivering goods or services. This is common in industries like construction or custom manufacturing, where upfront costs are necessary. To elaborate, let’s say, if you’re building a custom home, you might require a deposit invoice for 30% of the total project cost before starting construction to cover initial materials and labor costs.

Moving ahead, let’s get the hang of why you need to track your accounts receivable. 

Why is it important to track your accounts receivables accurately?

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Accurate tracking of your accounts receivables is vital for several reasons:

• Cash flow management

Keeping tabs on your AR helps ensure you have enough cash flow to cover operational expenses. According to QuickBooks, 60% of small businesses struggle with cash flow management.

• Reduce overdue payments

By monitoring AR closely, you can identify overdue invoices quickly and take action to collect them before they become problematic.

• Financial forecasting

Accurate records allow you to predict future income based on outstanding invoices, helping you make informed business decisions.

• Improved customer relationships

Timely invoicing and follow-ups show professionalism and can strengthen relationships with your clients.

Research indicates that businesses with effective AR management see a substantial improvement in cash flow compared to those without proper tracking systems. A recent survey showed that 91% of mid-sized accounting firms with automated AR systems had more savings, improved cash flow, and growth. 

Now that you know how important it is to keep a tab on your accounts receivable invoices, let’s understand how you can go about processing and billing them.

How to do AR invoice processing and billing? 

Here’s a simple rundown of how you can process and bill your AR invoices:  

Step 1. Create the invoice

Use accounting software like QuickBooks or Xero to create invoices, or use a pre-made template in Word or Excel if you’re doing it manually. Then: 

• Enter transaction details: Input all relevant information such as customer name, description of goods/services provided, amounts due, and any applicable taxes.
• Assign an invoice number: Generate a unique invoice number for tracking purposes.
• Set payment terms: Clearly state payment terms (for example, net 30 or 60 days) so customers know when their payment is due.
• Review for accuracy: Double-check all entries for accuracy before sending out the invoice.

Step 2. Send the invoice

Send the invoice via email for quick delivery or through traditional mail if preferred by the customer, and use an online portal if your accounting software offers this feature. However, if sending via email, request a read receipt or follow up to ensure the customer received it.

Step 3. Track payments

Use your accounting system to track payments against issued invoices and regularly check your accounts receivable aging report to identify overdue invoices. You can also set up alerts/reminders in your accounting software for upcoming due dates or overdue payments to stay informed better. 

Step 4. Follow up on overdue invoices

Don’t just send invoices and assume every customer will reply back or take the desired action promptly. A follow-up is always necessary. Here’s how you can do it:  

• Send payment reminders: A few days before the due date, send a polite reminder email about the upcoming payment due date.
• Contact customers directly if needed: If payment isn’t received by the due date, reach out via phone or email for a more direct follow-up.

Remember, be professional but firm when requesting payment.

Step 5. Record payments received

After sending the invoices, make sure to record: 

• Update your accounts receivable ledger: Once payment is received, update your records immediately.
• Apply payments correctly: Ensure that payments are applied against the correct invoices in your accounting system to maintain accurate records.
• Issue receipts if necessary: Consider sending receipts to customers after payments are processed as proof of payment received.

In short, the process is simple and straightforward but to reduce the risk of errors and add more efficiency to it, you can automate it. Let’s see how it can benefit you.

Advantages of invoice automation

You can also automate the entire process through accounting software and reap these benefits for your business: 

• Error reduction

Automating your invoicing process minimizes human errors that can lead to incorrect billing amounts or missed invoices. Automation ensures consistency in how invoices are generated and sent out.

• Better cash flow

Automated systems send invoices promptly after services are rendered or goods delivered, improving collection times and enhancing your cash flow significantly.

• Enhanced data privacy

Automation tools often come with secure data management features that protect sensitive customer information from unauthorized access or breaches.

• Fewer chargebacks and smooth reconciliation

With accurate invoicing through automation, you reduce disputes and chargebacks, making reconciliation easier at month-end. This leads to more accurate financial reporting overall.

Want to reap the benefits of automation? Synder is where you start!

Manage your AR invoices with Synder 

Synder is an accounting software that automates the way you sync, record and recognise online sales. The software allows you to automate invoicing processes, track payments efficiently, and integrate with 30+ popular platforms like QuickBooks, Xero, Stripe, PayPal, Amazon, Shopify, and more. Let’s focus on the invoicing functionality.

Synder offers a comprehensive suite of features that simplify and automate the invoicing process, ensuring accuracy and improving cash flow:

1. Automating the process of creating and sending invoices: By integrating with platforms like QuickBooks Online, Stripe, and Square, Synder automates the creation of one-time or recurring invoices. 

2. Monitoring payments: Synder tracks the status of invoices, showing which are paid and which are overdue. The tool also automatically applies payments to open invoices and closes them in your records to maintain accurate bookkeeping.

3. Sending payment reminders: Synder sends automated reminders to customers about upcoming or overdue payments, helping businesses stay on top of accounts receivable.

4. Customizable and professional templates: Synder offers ready-made invoice templates that can be tailored with logos, colors, fonts, and even personalized thank-you notes to align with your brand and enhance customer relationships.

5. Simplifying payments with payment links: Generates payment links that can be shared via email, websites, or social media to make it easy for customers to pay directly. It also integrates with Stripe and Square, enabling seamless payment processing for faster invoice settlements.

6. Enhancing accuracy and efficiency: Synder automatically syncs transactions, matches payments to invoices based on customer name and date, and prioritizes older invoices for closure. It removes the need to manually compare received payments with open invoices, saving time and reducing errors.

7. Real-time notifications: Sends custom notifications about due payments and overdue invoices to both customers and businesses, ensuring timely follow-ups and proactive financial management.

By combining automation, customization, and easy payment options, Synder transforms invoicing into a seamless and efficient process, reducing stress and enabling businesses to focus on growth. 

Conclusion 

All in all, effectively managing your accounts receivable invoices is crucial for maintaining healthy cash flow and ensuring the financial stability of your business. With a solid understanding of the different types of AR invoices and their purposes and how you can process and bill them, you can streamline your billing processes and minimize the risk of missed payments. What’s more? By adopting automation tools like Synder, you can further enhance your invoicing efficiency, reduce errors, and improve cash flow management. 

So, don’t let cash flow issues hinder your success, take control of your invoicing today! Book a demo with Synder now and discover how it can expertly optimize your invoicing and accounting processes for better financial health!