An invoice payment refers to the payment a customer makes to settle the amount owed for goods or services.
It’s a scheduled transaction initiated when a business issues an invoice for payment. The invoice acts as a formal request, outlining the details of the sale and the payment terms.
Many businesses now prefer online invoicing as an invoice payment method, sending invoices electronically with direct payment links for faster processing.
Using accounting software can further simplify managing invoice payments, helping businesses automate the process and track outstanding balances.
In this article, we go through the invoicing process, from creating and sending them, to getting paid and dealing with any payment issues.
Here’s what we cover:
How does an invoice payment work?
Understanding the invoice payment process helps businesses get paid promptly and maintain healthy cash flow.
Here’s a step-by-step to how invoice payments work:
1. Create the invoice
The process begins when the seller creates an invoice after delivering products or services. The invoice is a formal request for payment and must include all the essential details, such as:
- Your company’s name and contact information
- Customer’s contact information
- A unique invoice number and issue date
- Description of products or services provided
- Itemised costs and any applicable taxes
- Payment due date (such as “Net 30”, indicating payment is due within 30 days)
- Payment terms, including late fees or early payment discounts
- Accepted payment methods
- Bank details (if applicable)
- Tax information (if applicable)
- Stage payments or instalments (if relevant).
Knowing how to write an invoice correctly can help you avoid delays. Automated invoicing software can simplify this step by offering pre-designed invoice templates and auto-calculating totals, ensuring professional presentation while minimising errors.
2. Send the invoice
Once the invoice is prepared, it needs to be sent to the client or customer. This can be done via email, post, or an accounting software platform.
When sending the invoice, include clear instructions about the accepted payment methods and any applicable late fees.
Many invoicing platforms allow you to set up automatic reminders for unpaid invoices, helping reduce the likelihood of overdue payments.
3. Invoice approval and payment authorisation
Once the customer receives the invoice, they will review the details to confirm they are accurate.
This step may include verifying the process against the purchase order, costing it to the appropriate project or account, and obtaining necessary approvals from finance or management.
Automating this process can streamline approvals by routing the invoice to the right people and sending automated follow-ups if there are delays.
4. Payment execution
Once the invoice is approved, the customer arranges payment. Payment methods vary and can include:
- Bank transfers (BACS)
- Credit or debit cards
- Cheques
- Online payment systems such as PayPal
- Digital wallets
Manual payment processes, such as posting cheques, can delay payments. Automated accounting solutions, on the other hand, help ensure faster, more efficient transactions.
5. Payment confirmation
Once the payment is made, it’s important to confirm receipt and send an acknowledgment or payment receipt to the customer. This serves as proof of payment and is useful for record-keeping.
Many accounting software platforms offer features that automatically send out payment receipts, making the process smoother and more efficient.
6. Updating records and reconciliation
With the payment confirmed, the next step is to update financial records to reflect the payment status and mark the invoice as paid.
This step, known as invoice reconciliation, ensures that all payments are accurately matched with the corresponding invoices.
Online accounting software can simplify reconciliation by flagging discrepancies and updating records in real time, keeping financial statements accurate.
7. Resolve payment issues (if required)
Payments may be delayed, or disputes can arise over invoice details. It’s essential to follow up on overdue invoices, communicate with the customer to resolve any issues, and keep a record of any duplicates.
Having a transparent payment policy in place can help manage late payments, and offering options such as payment plans may be necessary in some instances.
What are payment terms on an invoice?
Invoice payment terms specify when a customer needs to pay an invoice for goods or services. These terms can vary depending on your business’s cash flow needs and financial obligations.
Commonly used payment terms include “Net 30”, which means payment is due within 30 days of the invoice date, but you can set any payment period that suits your business, such as “Net 15” or “Net 60”.
If you don’t specify a due date, the default payment period is typically 30 days from when the customer receives the invoice. Clear payment terms help set expectations and avoid payment delays.
You can also incentivise prompt payments by offering discounts for early payment, such as “2/10, Net 30”, where a 2% discount applies if the invoice is paid within 10 days.
Additionally, requesting payment upfront for specific goods or services can help improve cash flow.
Choosing the right invoice payment method
Choosing the right invoice payment method is essential for your business’s cash flow and can help ensure that payments are made securely and on time.
Here are some of the most common methods for settling an invoice for payment:
Cheque payment
Paying by cheque is a traditional method that many businesses still use. It involves issuing a physical cheque to the vendor and sending it via post.
While this method can be straightforward, it’s also time-consuming and can pose risks such as delayed delivery or lost cheque. If a cheque is lost or stolen, it could result in late fees or even the need to reissue payment.
For these reasons, many businesses are shifting toward more secure and efficient invoice payment methods.
Cash payment
Cash payments are rarely used for invoice payments, especially for larger transactions. While cash can be convenient for in-person purchases, it’s not recommended for paying invoices due to the lack of security.
Cash can easily be lost or stolen, with no way to trace the payment or recover funds if something goes wrong. Digital payment methods offer a safer alternative.
Credit or debit card payment
Online payments made with credit or debit cards are popular due to their convenience and speed. These payments can often be processed instantly, ensuring the vendor receives the funds promptly.
Many payment processors also offer robust security features, such as encryption, to protect sensitive information.
Credit or debit card payments can be ideal for businesses looking for quick and reliable invoice payment options.
Mobile payment
Mobile payment apps such as PayPal and Apple Pay provide a convenient way to pay invoices, particularly for small businesses or freelancers.
Mobile payments are secure and allow for quick processing, making them suitable for both in-person and remote transactions.
This method is beneficial for paying smaller invoices or handling payments on the go.
Automatic payments
Setting up automatic payments for recurring invoices can help businesses avoid late fees and maintain good relationships with vendors.
This method involves scheduling payments to be made automatically from a designated bank account on specific dates.
Automatic payments are secure and efficient, but it’s important to ensure sufficient funds are in the account to avoid overdraft fees.
Bank transfer (BACS)
Bankers’ Automated Clearing Services (BACS) transfers allow businesses to send money directly from one bank account to another.
BACS payments are highly secure and offer an affordable way to pay invoices, with transactions typically processing within three business days.
The reliability and security of bank transfers make them a popular invoice payment method for many businesses.
Common challenges with invoice payments
Invoice payment challenges can vary by business size or industry, but many issues are widely experienced.
Some of the most common challenges include:
- Delays in making timely payments
- Errors in invoice details
- Missing or incomplete data
- Difficulty matching invoices to purchase orders and receipts
- Managing high volumes of supplier enquiries
- Duplicate invoices
- Missing or misplaced invoices
- Outdated or incorrect contact information
- Recurring invoice mistakes
- Manual processing that slows down workflows
- Lack of standardised invoice formats.
Using online invoice and accounting software can address many of these challenges by automating processes and ensuring smoother workflows, helping your business stay on top of payments more efficiently.
Best practices for on-time invoices and payments
Ensuring that your business pays and receives invoices on time is essential for maintaining strong cash flow and good relationships with customers and vendors.
Implementing these best practices can help you streamline the invoice payment process, reduce the risk of late fees, and improve overall financial management:
Create a clear payment process
Establish a well-defined payment process that includes setting payment terms, due dates, and any early payment discounts directly on your invoices.
Assign a dedicated person or team to manage invoice processing and payment follow-ups to ensure accountability and avoid delays.
Automate invoice processing
Invoicing software simplifies the payment process by automating tasks such as data entry, invoice generation, and payment reminders.
Automation reduces errors and saves time, allowing businesses to manage payments more efficiently. Choose software with customisable workflows to fit your organisation’s needs.
Take advantage of early payment discounts
Encourage your customers to pay invoices early by offering discounts for prompt payment.
Early payment incentives can help improve your cash flow, reduce the time spent waiting for payments, and strengthen relationships with customers by rewarding timely payments.
Set up automatic payment reminders
Online invoicing software can help you avoid missed payments by automatically sending payment reminders to customers before the due date.
These reminders can be customised to notify customers at various intervals, ensuring timely payments and reducing the risk of late fees.
Enable online payment options
Offering online payment options makes it easier for customers to settle invoices quickly and conveniently. Providing multiple payment methods, such as credit cards, BACS transfers, or digital wallets, can encourage prompt payments and help improve your cash flow.
Using accounts payable software can further streamline the payment process by automating payment tracking, reconciliation, and scheduling, making it simpler for you to manage payments.
Track payment status in real time
Invoicing software provides real-time tracking of invoice payments, allowing you to monitor which invoices are paid, pending, or overdue.
This visibility helps you manage outstanding balances effectively and take proactive steps to follow up on overdue payments.
Maintain effective communication
Keep open lines of communication with your vendors. Promptly address any enquiries, discuss payment schedules, and communicate any delays in advance.
Effective communication fosters transparency and trust, helping to resolve issues quickly and maintain good relationships.
Centralise invoice management
Online invoicing software keeps all your invoices, payment records, and customer information in one place, making tracking and managing payments easy.
A centralised system simplifies record-keeping, helping you stay organised and maintain accurate financial records.
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