Invoice Management Guide for Small Business - Complete Guide

Invoice Management Guide for Small Business - Complete Guide

Table of Contents
Table of Contents

As a small business owner, you’ll have to regularly deal with issuing invoices and paying back vendor bills in a timely manner.

If these processes aren’t done correctly, they could lead to tense business relationships with clients and suppliers, cash flow issues, and even risk exposure to lawsuits.

That’s why it’s important for every business to invest in an effective invoice management system, that automates the invoicing process and minimizes error.

In this guide, we will explain everything you need to know about invoice management, along with the best online invoice management system you can use to automate invoicing.

Read on to learn about:

What Is Invoice Management?

Invoice management is a process that includes invoicing clients for products or services they’ve purchased, and making timely bill payments to vendors and suppliers.

Invoice management can typically be done in two ways, manually or the automated way.

Managing your invoices manually is generally time-consuming and it includes creating invoices using a text editor like Word. The same applies for making your invoices using Excel.

Bill payments have to also be done manually using different apps and interfaces, or sometimes even in-person via mail.

It goes without saying, doing invoice management manually can lead to a ton of accounting errors that will simply make you waste more time and money.

That’s why most businesses have moved on from the age of pen and paper to faster, more reliable, and less costly invoice management systems.

An invoice management system is an online platform designed to automate most of your invoicing processes, saving you time, money, and a whole lot of stress. These systems include features such as premade invoice templates, notifications and alerts for upcoming invoices, intuitive and easy-to-use dashboards, direct bank integration, automatic tax calculation, and much more.

Invoice Management & Accounts Payable

The key to an effective supply chain is paying back vendor invoices on time. Suppliers who get regularly paid without delay, deliver goods and services without complications.

Accounts payable (or AP for short) is the account that represents the balance your business owes to these creditors and vendors. It’s recorded under the balance sheet, as a current liability.

AP can also be referred to as the department that deals with the entire invoice payment process, from verifying invoices against the purchase order to issuing the payment in the end.

Now, how is the recording of AP under the balance sheet done?

First, you have to make a journal entry where you credit accounts payable and debit the corresponding expense account. Then, when your business pays back the invoice, another double-entry is created where cash is credited while accounts payable is debited.

Accounts Payable Practical Example

Say you receive an invoice of $400 for purchasing a paper shredder for your office.

The entry for this transaction would look like this:

Once the invoice is paid off, then the following second entry gets created:

To learn more about analyzing and recording your business’ financial data, head over to our guide on the accounting cycle.

Invoice Management & Accounts Receivable

When you’re on the side of the supplier who is issuing the invoice, the transaction gets recorded into accounts receivable as an asset. Accounts receivable is the opposite of accounts payable.

It represents the cash your customers owe you from purchasing products.

Again, just like in AP, you have to make a double-entry to record the invoice in the balance sheet.

In this case, you first have to debit accounts receivable and credit the sales account. Then after the customer sends the payment, cash is debited while accounts receivable credited.

Accounts Receivable Practical Example

Here’s a practical example to better understand the process.

Let’s assume you issued an invoice to your customer for $150 worth of products. This is how that transaction would look like:

After the client pays back, it is recorded as shown below:

What Are the Steps of the Invoice Management Process?

1.  Send a Purchase Order to the Vendor

Invoice management starts with creating and sending a purchase order to the vendor.

A purchase order is an official request for a product or service, sent from you as a buyer, to the vendor, to authorize all of the details of a purchase.

This document should include an itemized list of the purchase, desired quantity, and agreed-upon prices. You can also add any additional notes or requests regarding the order.

Now, although a purchase order usually contains the same elements as an invoice, they are not the same thing. An invoice is sent by the seller to request payment, while the purchase order is the official demand for a good or service.

2.  Review Invoice Details

After getting your hands on the ordered goods, and receiving the supplier invoice, it’s time to process it to accounts payable.

Before doing so, however, you should always confirm there aren’t any inconsistencies from the original order.

Double-check these three main invoice elements:

  • The invoice due date (i.e: payment terms)
  • List of products & services
  • Total cost

If you notice any errors, give your supplier a call or email to discuss the issue and request another invoice.

3.  Choose Preferred Payment Method

Invoices usually come with different kinds of payment methods, so you can choose whichever option suits your business best.

The four most common types of payment methods are:

  • Cash. Cash is mostly used for small, up-front purchases. However, it’s not a safe option since it can get easily misplaced, lost, or stolen.
  • Checks. Checks are relatively cheap and secure, but they’re a time-consuming option.
  • Online credit card payments. These are fast, easy, and secure.
  • Automatic billing and mobile payments. These are processed automatically through accounting software. You can make payments by simply integrating your bank account and credit cards with the software and pressing Send.

Create Invoices for Customer Purchases

After paying back all your bills, it’s finally time for you to sell products and get paid in return.

The first step is creating an invoice with all of the appropriate invoice elements.

With premade invoice templates and invoicing software, this process can be done within seconds. However, if you want to start from square one and create your own invoice template, you’ll need the following elements:

  • Header with the word “Invoice”
  • Business and client contact details
  • Invoice number
  • Name and description of the product or service
  • Cost per unit and the total amount
  • Billing date
  • Due date
  • Terms of payment

These are just the basic elements an invoice needs to be considered a legally-binding document. Not all invoices follow this exact same format, though.

Depending on the industry, clients, or products sold, you’ll have to deal with various invoice types that serve different purposes and include additional details.

Want to learn more about the main elements of a professional invoice? Head over to our guide on how to make an invoice & get paid faster.

Send Out the Invoices

There are three main methods you can send an invoice with:

1.  Physically in person, by fax, or through snail mail. This is the most traditional and outdated way of sending an invoice. It includes printing out the invoice, putting it in an envelope, stamping it, and dropping it by the post office or delivering it in hand.

2.  Email. When sending an invoice via email make sure to include:

  • A subject line with the invoice number
  • The attachment of the invoice in pdf
  • A short professional message

3.  Invoicing software. This is the fastest and easiest way to send an invoice. All you have to do is fill in the invoice information on the online software, and press Send.

After sending the invoice, the next step is to make a double-entry to record it into accounts receivable, as we previously explained.

If you’re using invoicing software, however, you won’t have to worry about bookkeeping because the invoice will automatically create entries in their respective accounts.

Automating Invoice Management

Switching from manual invoice management to an online invoicing system can be a life-changing decision for your small business accounting.

Now, you’re probably thinking: how do I decide which invoice management system is the right one for my business?

Well, the right invoicing system will help you streamline and automate almost every part of your invoicing process.

With intuitive cloud accounting software like Deskera, creating and sending invoices is as easy as 1-2-3.

Deskera offers over +100 professional premade invoice templates you can personalize with your business logo, color scheme, font, and more. Then, you just fill in the information on the left sidebar with the appropriate invoice elements, and you’re done!

Press Share, and wait to get paid!

Deskera Invoice Management Professional Templates
Deskera Professional Invoice Templates

To overview your invoices, and manage outstanding payments, you can head over to the Deskera Sell dashboard.

From that same dashboard, you can also automate other parts of your accounts receivable with features such as recurring payments, advance deposits, tax compliance, and more.

Deskera Sell Dashboard
Deskera Sell Dashboard

Requesting orders and making invoice payments to vendors can be done just as easily, from Deskera’s Buy dashboard.

Just enter the purchase details, press on Create New Bill, and send the purchase order over with two simple clicks!

Deskera Buy Dashboard
Deskera Buy Dashboard

The best part: you can access the platform anywhere, mobile, tablet, or desktop by simply downloading the Deskera mobile app.

Still not convinced Deskera is the right choice for your business?

Well, luckily you can try the software out yourself, with our completely free trial.

8+ Tips for Invoice Management

  1. Automate payment reminders in invoicing software, or set them up on your Google Calendar so you never miss a payment.
  2. Keep track of suppliers who offer early discounts, and stock up on seasonal sales.
  3. Avoid overspending by creating realistic budgets for your expenses.
  4. Open a business bank account to separate your business income from your personal finances.
  5. Always give your clients a call after sending out an invoice, to make sure they received it.
  6. Consider late payment fees to encourage clients to pay you back in time.
  7. Try to offer a range of payment methods such as check, cash, credit card, mobile payments, etc.
  8. Don’t wait more than 48 hours to issue an invoice, after services and products have been delivered.
  9. Use accounting software to automate most of your invoicing process.

Invoice Management FAQ

Is a Paid Invoice the Same as a Receipt?

No, a paid invoice and a receipt are not the same things. While both documents are issued by the seller, they serve different purposes.

Firstly, an invoice is issued by the seller to request payment. Once that invoice is paid, the seller creates and sends a receipt to the buyer, to confirm that the payment has been received.

How Much Time Should You Give Clients to Pay an Invoice?

The rule of thumb for paying back an invoice is net-30, which means the client has 30 days to send payment.

However, there isn’t a clear-cut answer because payment terms depend on different factors such as your business’ industry, relationship with the clients, or total amount of the invoice.

What is the Difference Between a Bill, Invoice, and Receipt?

The invoice is issued by the seller to detail the products and services purchased by the client, and to request payment. Then, this invoice is received by the customer (buyer) as a bill they have to pay.

In the end, after the customer pays, the seller issues a receipt as proof of payment.

When Is the Best Time to Send Out an Invoice?

The sooner, the better! After making sure there are no concerns with the order, immediately issue the invoice.

In situations where you’re dealing with time-consuming, large-scale projects, consider requesting advance payment or a deposit.

What Should I Do If I Send an Incorrect Invoice?

If you send an incorrect invoice, fix it by creating a new cancellation invoice. Then, issue another correct invoice (with a new reference number), and send it to the customer.

Consider writing a short apology note, explaining the situation and actions you took to fix it.

Key Takeaways

And that’s a wrap! We hope you found our guide helpful in understanding how the step-by-step invoice management process works.

Before leaving, let’s go through a recap of the main points we’ve covered:

  • Invoice management is the method businesses use to issue invoices to their customers and process payments to suppliers.
  • Accounts payable records debt owed to creditors, while accounts receivable represents the unpaid amount from clients.
  • The main steps of invoice management include:
    • Approving & sending a purchase order to the vendor
    • Reviewing invoice details
    • Choosing the preferred payment method
    • Creating invoices for customer purchases
    • Sending out the invoice
    • Managing accounts payable
  • Use accounting software like Deskera to automate your entire invoice management process.
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