Billing vs invoicing – most of us use these terms interchangeably, but in the corporate world they have some distinguishing qualities. They are an essential financial function that allows your customers to pay while meeting the payment terms. Though these terms don’t get the credit in the accounting they deserve, they have due respect in the accounts receivable function or when the company makes credit sales. Because customers delaying their payments to settle debt will affect customer experiences. Bills, invoices and payment delays also affect your business’ bottom line which makes a noteworthy topic for discussion. This blog will highlight the differences between bills and invoices while also exploring the payment terms and conditions elements of the invoicing process.
Differences between Billing and Invoice
Understanding Billing
A bill is evidence of a transaction to both the seller and the customer. It refers to the amount of money a customer owes to the seller or a selling firm. Customers are likely to pay for the products or services they obtain or consume. Depending on the billing process, a bill may be printed, written out or sent digitally to the customer. Essential elements of a bill include the price of a product or service, taxes applicable and items purchased.
Understanding Invoices
An invoice is an extended version of a bill that details the list of items purchased, the price of items and who will pay for the services or items provided. The purpose of an invoice is to request payment from a customer. Sometimes an invoice may also detail the discounts, credits, taxes and payment method for customers to make payment. Other elements mentioned in the invoice include payment terms, time frame and condition whether the customer will be charged for overdue payments.
Businesses making credit sales may require payment after some time instead of immediate payments. An invoice can also be sent by mail in a written format or email in a digital format. Using a digital invoicing format is one of the best ways to improve accounts receivable collections as it increases the efficiency of invoice collections due to accurate and prompt delivery of invoices.
Comparing Bills vs. Invoices
Understanding bills and invoices, you will be clear about the two terms and what they contain. This section will compare bills with invoices for a better understanding.
- A bill is a document that is generated by a retailer or an organization for upfront transactions. Conversely, an invoice can be generated depending on the kind of invoice – printed or digitally generated. The invoice mentions a time when a client can settle the debt.
- For an upfront transaction, a bill can be generated in a single setting where a customer pays for services or products purchased. However, an invoice can be recurring routinely seeking prompt payment. Many B2B organizations have vendors to source goods and materials every month for which a recurring invoice is generated.
- Businesses and organizations in the B2C industry use billing that includes shopping malls, retail shops, grocery stores, and restaurants among other places. In contrast, an invoice can be generated for purchasing inventory for a business, replenishing raw materials, and other goods in the B2B industry. Other uses of invoices are in the form of taxes where an invoice can be generated.
- A bill is a less formal document than an invoice, but the latter serves a bigger purpose in B2B sales where it defines the payment terms as well as details on itemised charges. Enterprise-level corporations in the B2B space embrace accounts receivable automation software to streamline invoicing and collection workflows to speed up invoice delivery and cash collection. However, automating billing does not offer as much flexibility as the invoicing automation feature offers.
The preceding comparisons shed light on the distinctions between a bill and an invoice. For a more in-depth exploration of invoices and their components, the subsequent section of the blog delves into the details.
Understanding Invoice Payment Terms and Conditions
Terms and conditions of the invoice payments are set by a seller which determines when a buyer can pay to settle debt, and what is the deadline of the invoice generated. All these terms are specified on the invoice usually, but a seller can also mention those in the agreement before making a sales transaction. A discount on early payment or a penalty on late payment can also be mentioned on an invoice.
All these mentions serve the purpose of clarifying the payment expectations between the buyer and the seller, helping to manage cash flow while reducing the financial risk. The sellers also make sure to free their cash flow from bottlenecking, in case of a late payment from a customer. Terms like Net 30 indicate the invoice is due 30 days after the purchase date. Similarly, 2/10 Net 30 indicates that there is a 2% discount if the invoice is cleared within 30 days.
How Invoice Payment Terms Affect the Organization Selling on Credit
Organizations practising credit sales rely on invoices to notify customers about the bills they need to pay according to the mentioned terms and conditions. There are several ways an organization can utilize an invoice to collect payments while facilitating customers to deliver positive experiences. Following are some common ways organizations use invoices.
- Split Payments
Business organizations or merchants selling luxury items or inventory that sums in huge amounts can allow their customers to split payments. This can be achieved by setting the terms and conditions of an invoice to split payments. By accepting smaller payments in time, the merchant organization will receive a stream of income frequently, rather than longer payment periods for big payments. This will help unlock cash flow for the seller company while allowing customers convenience to make split payments.
- 50% Upfront Payment
Including a 50% upfront payment clause in your invoice may concern your customers, but it will help maintain positive relations, in case a customer delays payment. This strategy will help you cover the costs associated with the sell order by receiving a portion of the total price before making a delivery.
- Cash before Shipment or Cash before Delivery
A cash before delivery payment term is placed by a merchant when dealing with long-distance deliveries or expensive shipping. This approach can be used as a precaution, allowing a business to secure its cash flow by getting paid up front, in case the customer doesn’t pay or cancels the order. By including this term in your invoice, you will be protected before anything goes wrong. Otherwise, any mishap, or delay in shipment can impact your cash flow.
- Early Payment Discounts
Another significant use of an invoice is to offer discounts to your customers on early payment. This payment term has a positive impact on the company’s cash flow and also secures good relationships with the customers. By offering discounts, a company will get paid promptly to maintain its cash flow. Customers on the other hand will get a discount that is something in return for the early payment.
Final Thoughts
Bills and invoices are essential elements of a sales process in the B2C and B2B markets. Though they are different, they serve the same purpose which is to request payment for products or services delivered. Invoices can be used in several ways with a variety of payment terms depending upon the seller. Vendors also set payment terms to manage their cash flow and save from inherent risk. Requesting payment upfront, offering discounts on early payment and splitting payments are some common terms and conditions that merchants use to get payment.