What is an invoice number?
An invoice number is a unique set of numbers and alphabets that is placed on every invoice a business processes. Don’t get us started on what an invoice is, because that’s quite understandable, right:p? Anyhow, think of an invoice number as the “fingerprint” of a transaction, allowing both parties to easily track and reference payments.
It’s vital not just for bookkeeping but also for maintaining organised financial records. Every financial transaction that your business makes, should be invoiced with an invoice number.
What to include in your invoice?
When crafting any type of invoice, especially with an invoice number in the bill, certain key elements should never be overlooked:
- Business name and contact information: This should ideally be at the top of the page.
- Client’s name and contact information: This makes sure the recipient is unmistakably identified.
- Invoice number: This is the unique identifier, such as the initials of your company. It differentiates all the invoices and increases the speed of processing.
- Invoice date: This shouldn’t be back-dated more than 5 days.
- Description of services or products: Details about what the invoice covers.
- Payment terms: Specify when payment is due.
- Total amount due: The sum that needs to be paid.
- VAT breakdown: To comply with the HMRC guidelines, the invoice should show the VAT breakdown.
- PO number: This is the purchase order number, which tells which products or services a business wants from a particular supplier.
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Invoice number example
If your business generates a monthly invoice for a recurring client, you might structure your invoice number like this: INV-2024-07-001. Here:
- ‘INV’ stands for invoice.
- ‘2024’ is the year.
- ‘07’ is the month
- ‘001’ is the sequential number for that particular invoice.
Why are invoice numbers important for businesses?
Invoice numbers play an important role in the financial operations of a business. They are more than just a sequence of digits – they are a key tool for maintaining order and ensuring smooth transactions.
1. Streamlined record keeping
Invoice numbers allow businesses to maintain organised and easily accessible records. Each invoice number corresponds to a specific transaction, making it easy to locate, review and reconcile invoices during accounting or auditing processes. This organisation helps in tracking payments and managing accounts receivable efficiently.
2. Prevention of duplicate payments
With unique invoice numbers, businesses can avoid the costly mistake of duplicate payments. Each invoice can be checked against records to ensure that it hasn’t already been paid.
3. Simplifying tax filing
During tax season, having a well-organised system of invoice numbers makes filing easier and less stressful. Businesses can quickly pull up relevant invoices to verify income and expenses, ensuring compliance with tax regulations.
4. Better customer communication
When discussing payments with clients, an invoice number provides a clear reference point. This clarity resolves disputes, confirms payment statuses and maintains transparent communication with customers. Result? High trust and better business relationships.
5. Improved cash flow management
By tracking unpaid invoices using invoice numbers, businesses can better manage their cash flow. Knowing which invoices are outstanding helps in planning for cash inflows and ensuring the business has enough liquidity to meet its necessary expenses and payments.
According to a report by Skynova, 61% of late payments are due to incorrect invoices.
What invoice number should I use?
Now that we’ve discussed the benefits of having invoice numbers, let’s discuss some of the ways of generating them. The format of the invoice number you select depends on your business needs, the level of detail you require and the volume of invoices.
- Sequential invoice numbers: Sequential numbering is one of the simplest and most commonly used methods. Each new invoice receives the next number in the line, starting from a chosen base number (e.g., 001, 02, 003).
- Client-specific invoice numbers: Assigning invoice numbers based on client identifiers is another effective method, especially if you manage multiple clients. For example, you could use a unique client code followed by a sequential number (e.g., ABC001, ABC002 for client ABC).
- Chronological invoice numbers: Chronological numbering involves incorporating the date and year into the invoice number. For example, you could use a format like 2024-001 or 2023-001 where the first part indicates the year or month and the second part is sequential.
- Project-based invoice numbers: If you’re in a manufacturing industry or own a production capacity, using project-specific invoice numbers can be beneficial. You can assign a unique project code followed by a sequential number (e.g., PROJ01).
- Custom alphanumeric codes: Some businesses prefer creating custom codes that combine elements such as client ID, project code and other details. An example of this type is ABC-P01-2023-001, where ABC is the client, P01 is the project, 2023 is the year and 001 is the sequence number.
Issues with invoice numbers & how to solve them
Invoice numbers are crucial for maintaining organised financial records as they correctly identify the payor and payee, mention the due date and the amount to be paid. But if not managed properly, they can create some issues.
1. Duplicate invoice numbers
Duplicate invoice numbers can occur when multiple invoices are created manually or when different departments within a company use inconsistent numbering systems. This can lead to confusion and payment delays.
Solution: Implement a centralised invoicing system that automatically generates unique invoice numbers.
2. Missing invoice numbers
Missing invoice numbers can disrupt the continuity of your records, making it difficult to track payments and reconcile accounts. This issue often arises from human error such as accidentally skipping a number when manually entering invoice details.
Solution: Use accounting software that automatically assigns invoice numbers sequentially.
3. Inconsistent numbering systems
This problem can occur when different formats are used within the same organisation. For example, some invoices use a sequential system while others incorporate client codes.
Solution: Standardise the invoicing numbering system across the entire organisation. Establish clear guidelines for how invoice numbers should be formatted and used.
4. Difficulty in tracking invoices
Businesses may struggle to track invoices, especially when dealing with a high volume of transactions. This can result in lost or overlooked invoices, which can adversely affect the cash flow.
Solution: Implement an invoicing software that includes a searchable database. This allows you to quickly locate invoices by number, client or date. Microsoft Excel is the simplest example of all, but there are full-fledged accounting software for invoicing available in the market of the UK. Choose a suitable one for your business.
All of this is represented in the table below as well:
| Problem | Description | Solution |
|---|---|---|
|
Duplicate invoice numbers
|
Occurs when multiple invoices are created manually or departments use inconsistent systems, leading to confusion. |
Implement a centralised invoicing system that auto-generates unique invoice numbers. |
|
Missing invoice numbers |
Human error can result in skipped or missing numbers, disrupting records and making tracking payments difficult. |
Use accounting software to assign invoice numbers sequentially, ensuring none are missed. |
|
Inconsistent numbering systems |
Different formats used across departments cause inconsistencies, such as combining sequential numbers with client codes. |
Standardise numbering formats across the organisation and set clear guidelines for invoice numbers. |
|
Difficulty in tracking invoices |
High transaction volumes can make it hard to track invoices, leading to lost or overlooked invoices, impacting cash flow. |
Adopt invoicing software with a searchable database for easy invoice retrieval by number, client, or date. |
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Invoices should be kept for at least 5-7 years. This retention period aligns with most tax laws and regulations, ensuring you have the necessary documentation for audits, disputes and financial reviews. It’s better if you have digital backups for easy access and to prevent loss.
A purchase order number is a reference number provided by the buyer. It links the invoice to the original purchase order, helping both buyer and seller track and verify orders.
No, an invoice is a request for payment issued before the payment is made, while a receipt is a proof of payment given after the transaction is completed. Invoices detail the amount due, while receipts confirm payment has been received.
