Inventory Forecasting For Your Business – What You Must Know

Posted on by Kaylyn Perry

Forecasting the amount of inventory you need at any given time is always a challenging task. Businesses have to take into account the many variables associated with the timely delivery of stock as well as the unprecedented factors that may affect proper inventory management. While it’s true that inventory management is just one aspect of owning a business, not a lot of people realize the amount of work that goes into considering even the smallest details to ensure that customer demand is met.

Fortunately, there are a lot of techniques that businesses can use in order to avoid inventory issues. Having a deeper understanding of your inventory, through proper inventory forecasting, can help increase your revenue and eliminate stockouts.

What is inventory forecasting?

Inventory forecasting is a method used to predict the amount of inventory needed to satisfy future consumer demand. Businesses that conduct proper inventory forecasting can make informed decisions about future demand which, in turn, helps with financial management and inventory optimization. But how do you actually conduct proper inventory forecasting?

How do you forecast inventory?

Contrary to popular belief, inventory forecasting is more than just educated guesswork. Most inventory forecasting methods involve the use of historical data, past sales trends, and expert opinion from industry experts. However, it is important to keep in mind that inventory forecasts are not foolproof. Unforeseen external factors can always invalidate your predictions no matter how accurate you think they may be. To better understand inventory forecasting, there are certain factors you need to be aware of.

Understanding your inventory turnover ratio

Simply put, a business’s inventory turnover ratio is the rate at which a business sells and replaces its inventory during a certain period. If you’re wondering how you can calculate your own inventory turnover ratio, use the formula below:

Cost of Goods Sold ÷ Average Inventory = Inventory Turnover Ratio

What’s the importance of inventory turnover for a business? Great question! If you want to accurately predict your future inventory needs, it is absolutely necessary to look at how fast your inventory sells. Your inventory turnover ratio should also give you an idea about how efficient your operations are compared to industry standards. In general, a high turnover ratio means your sales are strong while a low turnover ratio indicates poor sales and excess inventory.

Improving your lead time

When it comes to inventory management, lead time represents the time it takes for a company to fulfill an order and replenish inventory after a customer receives an order. Factors such as shipping delays, stockouts, and human error may all play a role in longer lead times. Improving your lead time lets you get ahead of the competition by increasing the efficiency of your output, translating into faster order fulfillment.

Setting your reorder point

The reorder point (ROP) is the threshold that businesses set to trigger stock replenishment. According to QuickBooks, a specific product’s reorder point can be calculated by multiplying a product’s average daily sales to its delivery lead time and adding that to your safety stock.

(Average Daily Sales x Delivery Lead Time) + Safety Stock = Reorder Point

Setting an accurate reorder point saves businesses money from unnecessary inventory holding costs as well as prevents stockouts. It’s also important to remember that different products get sold at different rates. This means that you may have to set different reordering points depending on a product’s average daily sales.

Calculating your safety stock

As the name implies, safety stock refers to the extra inventory held by a business to reduce the risk of stockouts. Having the right amount of safety stock allows businesses to keep extra products on hand in case there is an unexpected increase in demand or a supplier fails to deliver items on time. Here’s how you can calculate your safety stock:

(Maximum daily usage x Maximum lead time) – (Average daily usage x Average time in days) = Safety Stock

Analyzing industry trends

No matter how established your business is, one trend change may affect the overall demand for your product. While qualitative in nature, looking at industry trends is one of the most important facets of inventory forecasting. Spotting and analyzing relevant trends help businesses predict where an industry is headed and allows them to always stay ahead of the competition.

Considering the seasonality of your products

In business, seasonality refers to expected changes that affect the availability of products as well as fluctuations in demand and quantity. Seasonality plays an important role in understanding why businesses have high or low seasons and gives them an idea about what type of forecasting methodology to use.

How to do inventory forecasting? What are the different techniques?

As mentioned in the previous section, there are different factors to consider when forecasting inventory. The same goes when choosing which inventory forecasting technique to utilize. In this article, we will talk about two types of forecasting methods: qualitative and quantitative inventory forecasting.

What is qualitative forecasting?

Qualitative inventory forecasting involves predicting consumer demand based on trends, seasonality, and the current status of the industry and the overall economic climate. This type of forecasting method is often characterized as subjective and non-mathematical. Qualitative forecasting is most useful in situations where data is unavailable or inadequate. Its main advantage is its ability to see external factors that may influence consumer behavior. Usually, qualitative forecasts are given by experienced sales professionals, production planners, marketing managers, and industry experts. Some of the most common types of qualitative forecasting include gathering executive opinion, conducting market research, and using the Delphi technique.

Side note: The Delphi technique is a forecasting method that collects the opinions of industry experts through a series of questions. When it comes to inventory management, this type of qualitative forecasting method is often used to predict future demand for a certain product.

What is quantitative forecasting?

Quantitative forecasting, as opposed to qualitative forecasting, involves the use of concrete data when predicting future revenue. Through the application of statistics on historical data, businesses can accurately calculate future demand as well as determine patterns that may influence a product’s future sales performance. What sets quantitative forecasting apart is its objectivity. This means that forecasts are based on hard numerical information and are not susceptible to prejudice or partiality.

What is the importance of inventory forecasting?

Inventory forecasting, if done properly, helps businesses secure enough stock to satisfy customer demand. It also gives businesses an idea about how much future capital they would need to be able to purchase additional inventory and meet customer demand. Other benefits of inventory forecasting include:

  • Reduce the instances of overstocking and stockouts
  • Increase customer satisfaction
  • Better overall inventory management
  • More accurate budgeting and labor scheduling

One underrated benefit of inventory forecasting is more accurate budget planning. Businesses, especially small to medium ones, do not have the same financial leeway as their larger counterparts. This means that small to medium-sized businesses are more prone to overstocking and stockouts due to a plethora of negative factors such as inventory mismanagement, delivery and logistics issues, and working capital shortage.

If you don’t want to miss out on future sales due to poor cash flow, you should check out Kickfurther.

Kickfurther is the world’s first online inventory financing platform that enables companies to access funds they usually cannot acquire through traditional sources. We connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules allowing your brand to scale quickly without impeding your ability to maintain inventory.

How Purchase Order Financing Help an Ecommerce Business

Posted on by Kaylyn Perry

How Purchase Order Financing Can Help an Ecommerce Business

Whether it’s starting up or in the midst of rapid growth, maintaining positive cash flow is the element of survival for both a traditional and ecommerce business. Well-managed finances and positive cash flow allow your company to grow unchecked and withstand the inevitable headwinds while you develop your presence in the marketplace. A high percentage of businesses with excellent early promise, including ecommerce companies, fail because of poor cash management.

Knowing what financial resources and strategies are available to keep your boat afloat while you continue to grow is an essential component of any business development.

Ecommerce: The Great Advantage

In addition to not tying up huge amounts of your capital in bricks, mortar, and display, ecommerce usually offers the seller the benefit of receiving payment before shipment. Typically buyers see the range of products on your website or other Internet location and easily select the items and quantities they want. The buyer is then channeled to a payment portal where they pay for the order with a credit or debit card, or by other means.

Well-financed commercial customers and government agencies may also be customers of ecommerce businesses, and they are always looking for promising merchandise to market or use. In these cases, purchase order financing is a very viable option to consider, and it’s easy to obtain because of the customer’s creditworthiness.

However, the fundamental expectation of an ecommerce business is that you have the inventory to ship within a few days of when the order is placed or the core ecommerce advantage to the customer is lost. Depending upon how your supply chain is structured, i.e. your on-hand inventory and the supplier lead-time, the inventory investment will still precede the funds received from the transactions.

Financing Your Needs: The Order Surge

As any business grows, projecting incoming and outgoing cash becomes more complicated when demand is unpredictable, or unanticipated large bills suddenly strike. If your business is a combination of traditional and ecommerce retail, the product flow becomes more complicated.

What do you do when that seemingly delightful huge surge in demand or a single large order comes in that puts you in a quandary about how to proceed? Let’s say you have received an order of a magnitude that you’ve never experienced before. Once the initial euphoria subsides, you may realize that you do not have the inventory in-house or within your ready supply chain to fulfill the order. Your supplier may not produce and ship without payment in advance or a guarantee from a reputable source. Your cash-on-hand is not nearly sufficient to handle the manufacturing and shipping costs plus all of your normal daily expenses.

Having to reject an order because of a lack of funding can seriously blemish a company’s reputation. If this happens, the opportunity for other large orders may be diminished and your momentum can be permanently stifled.

Your only option is to borrow. But where do you go? You may have used up any normal business line of credit and other borrowing options could have been pretty much depleted, too. All you have is a purchase order for a sizeable volume from a reputable customer that must be shipped in five days. This can be a make-or-break situation for a growing company.

What is Purchase Order Financing?

Purchase order financing can be the financial bridge between the production and shipping for a large single order or multiple orders and the delivery to and payment from the purchaser. The solution may be that the large order you received can be placed with the producer along with a guaranteed payment from a purchase order.

How Does Purchase Order Financing Work?

Purchase order financing is ideal for handling large orders for which you may not have the funds to pay for upfront. The money is advanced to the supplier to produce the finished product.

For ecommerce purchase order financing, a written agreement is created between the seller and those involved in funding, in which those providing funding agree to pay the supplier. Those funding the purchase order advance the capital needed based on the calculated manufacturing and shipping costs. Those funding the purchase order are assured to be paid based on the sale of goods in the purchase order. In conventional or mixed businesses, once the products are delivered to the customer and an invoice is generated, the seller can pay those who funded the purchase order and receive his margin.

Another option is for the purchase order financier to open a line of credit with the manufacturer. The selling company eventually receives the total invoice price minus the fees paid to the funders.

One common misconception is that purchase orders are held as collateral for an equal or lesser amount of money advanced to you. In reality, the purchase order financing company pays money directly to the supplier for the finished goods that will be shipped to your customers. Customer funds go directly to the financing company and the difference between the supplier price and the retail cost minus the financing cost is distributed to the seller. One of the advantages to this process is that the company’s cash flow is not affected by the timing differences between income and outgo. Purchase order financing is used only for finished goods.

Finance Your Next Purchase Order

What is the Difference Between Purchase Order Financing and Factoring?

Two methods of financing transactions, purchase order financing and factoring, are quite different, but with traditional businesses they can be used in tandem to manage specific transactions. While they are used together, they will be applied to different segments of your supply chain. A purchase order financing program assists your company by financing the production or sourcing of inventory for large orders. A factor extends money to bridge the cash flow gap between the payment for goods sold and the receipt of payment.

As mentioned, these two funding sources are sometimes used in tandem to finance a large transaction. The purchase order financier pays for the inventory to be produced and shipped to the end user based upon a purchase order and the customer’s creditworthiness. The factor may then extendthe money to your company to pay the purchase order finance company based upon the accounts receivable.

Scenario

Those who fund purchase orders, love transactions that involve major retailers. For example, consider what would happen if a buyer for a retailer with a national presence should fall in love with a cooking utensil that you regularly market on your website. The buyer may want to test market an initial order that is beyond your financial ability to deliver. This is the type of scenario that those funding purchase orders prefer, since the payment is virtually guaranteed with such a prominent customer.

To put it simply, the process begins when the order is accepted, then the manufacturer/supplier is paid by the funding process, the product is shipped, the retailer remits payment to those who funded the purchase order, and then the seller receives the remaining portion of the gross margin after fees.

Advantages of Purchase Order Financing

Purchase order financing is not as difficult to obtain as some other types of financing if the financial quality of your customer is solid. Usually, the process can be set up quickly once the order has been verified. Small companies have generally used this process to great advantage and have employed these instruments to grow their business substantially. This works best when your company generates solid orders with sufficient pricing, the manufacturer has the adequate capacity to meet the time restrictions for production, and the credit quality of the customer is worthy.

In summary, the advantages of purchase order financing are:

  • An Ecommerce company may finance large orders without tying up its capital.
  • Customers will not be turned away because of an inability to deliver.
  • The receipt of timely payments will guarantee a company maintains an excellent relationship with its suppliers.
  • This financing may be combined with factoring to finance receivables in case customer payments are scheduled a considerable time after delivery.

Who is a Candidate for Purchase Order Funding?

Not every seller of goods can qualify for purchase order funding. Companies that qualify, including those in ecommerce, must meet certain specific criteria. These criteria may differ depending upon your company’s track record and stability.

The standard criteria are:

  • Must be a reseller of completely finished goods from a single 3rd-party finished goods manufacturer.
  • Gross margins must exceed a certain amount, usually greater than 25 percent.
  • Monthly sales should amount to at least $10,000.
  • Customers must have good credit or pay prior to shipment.

Manufacturing companies may not be candidates for purchase order financing for two reasons. Firstly, because they likely have several suppliers to create a single product so the transaction can be too complex. Secondly, if the finished products are not satisfactory the customer may not buy them, thus leaving the purchase order financier holding the bag.

Resellers with ecommerce sites are excellent candidates for this type of financing.

Applying for Purchase Order Financing

While it is important to establish a relationship with those financing your purchase orders, the transactions take place one at a time. To get the support for a specific transaction, you must have an itemized detailing of each step and cost component. Once the transaction is clearly understood, the most important part is the credit worthiness of the buyer — this is the central element of the value of the transaction.

Once customer creditworthiness is established, the details of the transaction emerge. A chart or spreadsheet is a good accompaniment to the application in order to demonstrate each logistical step and cost component.

Here’s an example of the timeline breakdown for LE BLOC, one of Kickfurther’s successful Co-Ops.

Purchase Order Schedule

In addition, contributors were provided with the purchase order breakdown to understand where the money was flowing.

Kickfurther Inventory Financing Breakdown

Making the Purchase Order Funders a Part of Your Team

As you finance your purchase orders, it’s important to build a relationship of trust with the contributors. As these purchase orders are separate transactions, you may need to tap into that audience of contributors again in the future. After all, if your business is growing the contributors will benefit as well.

Evaluate Your Supply Chain

Before a demand surge hits, you need a precise picture of your own supply chain. Chart all components, including supplier lead time to production, normal supplier on-hand inventory, order fulfillment time, and transit time to determine the maximum lead time required. Capitalize on your close relationship with the supplier and keep track of inventory quantities at all times. Also consider your own on-hand, ready-to-ship inventory, wherever it may exist.

All of this will create a complete picture of how much time is required to replenish stock. Since the key to ecommerce is to have product ready to ship on short notice, developing a system of accurate forecasting becomes critical.

Demand Forecasting

Too little inventory can be overly expensive because of late shipments, unplanned production costs, or emergency deliveries. Too much inventory is also costly in tied-up capital, storage and handling, and, in some cases, shelf-life expiration. Carrying the right amount of product in the right places is essential.

Accurate Forecasting Helps to Ease the Demand on Forecasting

Perfect forecasting is a key to success. Complex mathematic formulae have been created from historic and anticipated demand data to best handle the correct placement of products to meet short-term demand. In a growing multi-million ecommerce business, demand is not always predictable, largely because there is very little relevant historic or projected consumer data.

The first overwhelming order can leave even the most confident forecaster in tears.

Cash Flow Management and Growth

Facilities like purchase order financing and factoring remove a burden from an ecommerce company’s finances. Your special skills are in marketing and selling products. Therefore, your cash needs to be focused on developing the organization to manage and grow with your selling ability. The elimination of the financial burdens and timing of inventory management, large supplier payments, and accounts receivables simplifies your business in many ways. Besides sales and marketing, your ecommerce business should focus on partners and employees who understand your supply chain, can oversee faultless order processing and invoice management, while effectively managing the finances of a growing ecommerce venture.

Purchase order financing not only removes the burden of tying up capital for individual orders, the process also frees up capital for growth. As sales increase and orders are handled efficiently, your reputation will grow and more orders will follow. Additional products may then be added to your inventory and your position in the market solidified.

Without purchase order financing, your company may fail to execute a large order or a surge in orders, and your ability to grow will be seriously stunted. Or you may invest all of your available capital to complete a large order and be unable to meet payroll or other operating demands. This could signal the beginning of the end for your ecommerce company.

It is never too early to plan for growth. Check out all of your funding opportunities as you develop the business. Purchase order funding should be a ready weapon in your arsenal of business assets.

Interested in learning more about inventory financing through Kickfurther? Apply today at Kickfurther.com. 

 

 

 

Tech-Based Fulfillment: The Key to Growing a Successful E-Commerce Business

Posted on by Kaylyn Perry

Successfully running an online business requires the right technology to make everything from your website to your order fulfillment process run smoothly. Before the rise of sophisticated technologies, working with a third-party logistics (3PL) provider consisted of manually sending orders before a cut-off time each day. Retailers today rely on tech-based 3PLs to offer speed and convenience to customers, which, in turn, helps them stand out in an increasingly competitive marketplace.

In addition to traditional services such as warehousing, picking, packing, and shipping, the modern e-commerce business needs a fulfillment solution that also automates the process. Read on to learn how technology is a critical component of order fulfillment.

Integration with e-commerce systems

Tech-based 3PLs offer software that seamlessly integrates with all major e-commerce platforms and marketplaces. In a couple of clicks, with no technical know-how or developer work needed, you can connect your systems. This streamlines the flow of information to save you time and reduce the likelihood of typos (which often lead to greater returns, exchanges, replacements, and expedited shipping). Connecting multiple data sources provides a cohesive view of orders, inventory, fulfillment centers, sales channels, and customers in one place.

Connected to warehouse operations

As soon as an order is placed on your store, the 3PL’s software automatically selects the warehouse with your inventory that can send the order to your customer in the most efficient and cost-effective manner. Warehouse staff are immediately alerted to begin picking, packing, and shipping items in real-time. The same technology is used at the fulfillment center to send critical information back to the merchant. As a result, you have direct visibility into the 3PL’s accuracy rate. Even though you’re not physically there, you can view inventory levels at each warehouse, shipping status of each package, and other critical details at any time.

Real-time tracking and insights

By incorporating technology into the fulfillment process, you can view the history and status of every order as it moves from picking to packing and shipping. Each step is documented in real-time to help with transparency in service. If a customer has questions about their order, you can quickly and confidently answer them with the most up-to-date information. Out-of-the-box metrics – such as peak fulfillment times, revenue of orders shipped by day, sales by channel, and sales and quantity of orders by USPS zone – help you understand your performance. Once you know purchasing trends, you can see which products aren’t selling but are costing you money for warehouse space, and make better supply chain decisions.

Inventory forecasting

In addition to gaining visibility into current inventory levels at each fulfillment center, you can also get recommendations to inform future inventory-related decisions. Tech-based fulfillment uses historical data to help project when you should reorder inventory to prevent stockouts. By connecting the upstream activities of purchasing and manufacturing to the downstream activities of sales and product demand, you can ultimately make more accurate purchasing and production decisions.

Two-day shipping

E-commerce giants have set the standard for fast deliveries, and customers have come to expect nothing less. Optimizing where you store and ship out inventory can help you meet these expectations. A tech-based fulfillment solution will aggregate and analyze data for you to determine how you should split products across fulfillment center locations. Being able to warehouse inventory close to your customers helps you save on shipping costs and time in transit. If you strategically distribute your inventory to several warehouses, the technology automatically selects the facility closest to the shipping address to fulfill the order. The less distance or shipping zones the package has to move, the greater the ability you have to provide two-day deliveries.

Learn more

Tech-based fulfillment can help you create a seamless customer experience and grow your e-commerce business. This is done by combining warehousing and fulfillment services with software that includes inventory management, customer communication, analytics, and integrations with all of the major e-commerce platforms. If you’re looking to connect your online store with a tech-based fulfillment provider, check out ShipBob.

The Kickfurther Origin Story

Posted on by Kaylyn Perry

A question that I keep getting is “Why are you doing inventory financing?” Sometimes this is phrased as “that seems to be a really boring industry to try to launch a start up in, what the hell dude?” Well, I can’t deny that it doesn’t sound very sexy, but it’s something I’m passionate about. Let me tell you why.

 

CPG Merchandising

Capture

Before I drank the punch and really immersed myself in this start-up mentality and methodology, I was running a very old school merchandising company. We called ourselves CPG Merchandising, leaning on my family’s experience in sourcing and contacts in China, we had a pretty successful venture.

Our modus operandi (does this sound familiar?) was to take a product already being manufactured and change it somehow to make it unique. Sometimes we would do package deals, sometimes we would add a feature or change the product slightly. When we had a quote locked down with our factory, we would try to sell it to retailers here, with about a 30% margin added on.

This ended up being a very successful model for us, but increasing sales was only the beginning of our problems.

Problems with Cash Flow

Now my company had a very unique and extremely advantageous position in the market. This is relatively unheard of now, but we had great contacts and existing relationships. Our retailer was paying us Net15(everything is Net30 or Net60 now) upon receipt of bill of lading (BOL) and our factory only required a 30% deposit, the balance of which was due upon BOL delivery.

So if we received a $100k PO on October 1st, we would have had to put $30k deposit down with the factory on Oct 2nd. Giving about 30 days for production and 30 days for shipping we would then pay the balance ($70k) and then chase payment for about 15 days. If we got paid on time, we would collect about $135k for the goods.

So the way it worked out is that we were floating $30k for about 75 days, and $70k for about 15days. I approached banks, but they weren’t interested giving loans to a business my size. Factoring services offered to buy our accounts receivables at around a 10-12% discount, which would have demolished my margin and essentially run us into the ground.

So we scrambled and I essentially got a personal loan, which is how my business was able to operate and thrive. However, this seemed to be a major problem that was certainly slowing the growth of my company. I had to imagine that, with all the advantages we had, this was a problem for a lot of other businesses in a similar position.

So I slept on the problem… for about a year and a half, and when my sister completed her Kickstarter campaign something clicked for me. Why not create a marketplace where businesses that need capital, could negotiate with people who could provide it and allow both to grow in a mutually beneficial way?

So after a year of development, I present to you Kickfurther.com. I consider it a neat solution to a pretty noxious problem.

Five Ways to Finance Your Company’s Expansion

Posted on by Kaylyn Perry

Are you facing financial constraints in your efforts to expand your business? Many entrepreneurs encounter financial challenges as they grow and expand into new markets. Historically, loans from banks were the solution to this issue for small businesses. Unfortunately, not many companies can navigate the stringent bank loan requirements to access these funds.

Here are five alternative ways you can finance your company for expansion:

1. Find an Angel Investor

Partnering with an angel investor who will invest in your company either for a one time occurrence or for some ownership of the company is a great way to access capital for growth. When seeking an angel investor, apply the contemporary rules of being succinct. Have a clear strategy and avoid jargons. With tough economic turmoil, finding an angel investor may be a tricky route that calls for a strategic approach. Platforms such as angel.co are a great way to access a large networks of angel investors across the world.

 Alternative Sources of Financing

2. Try Factoring Financing

Factoring is a form of financing where companies sell receivables at discounted prices to get cash in advance. It can be useful for businesses that have not established comprehensive credit records or manufacturers who must fulfill orders long before payments. You can, for instance, pay a 2% fee that is equivalent to 24% annually. Many firms are now making factoring competitive to improve their bottom-line.

3. Consider Crowdfunding

Crowdfunding sites provide fun and effective means of raising funds. Set a goal about how much you’ll want to raise within a set period. Your family, friends and others then pledge various amounts of money on the site. However, traditional crowdfunding is not a long-term funding alternative. Platforms like Kickstarter and Indiegogo are great for launching new products to market but when it comes to scaling and existing company, they typically come short. Additionally, since the capital typically comes from the company’s existing networks and new customers, traditional crowdfunding has a high marketing cost that typically isn’t considered.

4. Secure an SBA Loan

With banks shying away from committing their money to smaller companies, the government attempted to provided a alternative through their Small Business Administration (SBA) loans. While SBA loans are supposed to be available for all small businesses, there are still qualifications that limit who has access to them. First, the SBA only guarantees loans to businesses that can’t afford the money they need using other means. That means you’ve applied for loans from other lending institutions and have been turned down. Also the business must meet the definition of small business according to the government’s specifications. Their definition of what qualifies as a small business actually closes the door on many companies. There are typically additional criteria that need to be met as the amount you’re applying for increases.

5. A Combination of Solution 1, 2 and 3

A new solution has emerged within the last two years. A mixture of the first three solutions, crowdfinancing is a great way for growing companies to access capital to expand their business. Platforms such as Kickfurther allow scaling businesses to crowdfund their inventory needs from individuals across the United States. Similar to factoring, Kickfuther only works with the funding of physical goods. With crowdfinancing, the capital for expanding businesses comes from a crowd of individuals across the United States. Unlike traditional crowdfunding, this new solution typically involves an existing community that is eager to partner with growing brands meaning there is less emphasis on marketing. Additionally, crowdfinancing has an emphasis on funding existing brands that have a track record of success instead of unproven ideas that have yet to show product-market fit.

Get started today at Kickfurther.com. 

7 Major Things You Need To Know About an Invoice

Posted on by Kaylyn Perry

One of the most important things when people go into business for themselves, either as an entrepreneur or freelancer, is to take care of their finances. This can be an overwhelming process for most, and rightly so.

Generally, small business owners tend to do a lot of their business tasks all by themselves. While this allows them to better control their business, it also means there’s a lot of information out there that they’ll need to catch up on. This includes working on the most important document for increasing cash flow—invoices.

In order to help alleviate that, we’ll look today at some of the most important things you need to know about an invoice.

#1 Be clear about what an invoice is

The most important thing to know about invoices it to actually be clear of what an invoice is.

Invoices are documents sent by a seller to the buyer after the goods or services have been delivered. It identifies the seller, buyer, and the products or services sold, including their quantities and prices.

It is legally-binding after both sides have agreed to the conditions and is also non-negotiable. Any changes that are requested by the buyer should be already prepared for (in your terms and conditions), or added on for an extra price.

However, buyers should not negotiate for lower prices or more goods for the same price when the products or services have already been delivered.

One invoice has two different terms depending on whether you are the seller or buyer. To the seller it’s a sales invoice, while the buyer calls it a purchase invoice. Both invoices are the same document, however, and the difference is in filing purposes only.

A sales invoice goes to account payable, whereas a purchase invoices goes to account receivable.

#2 And what an invoice isn’t

There are two important things that an invoice is not.

Primarily, it is not a receipt. A receipt is a record of what has already been paid, whereas an invoice is a record of what still needs to be paid. Even more, invoices are much more detailed than receipts (where some receipts may have only the total paid, the date, and the store details).

It is important, when a supplier requests an invoice, not to present him a receipt, or vice versa.

Secondly, an invoice is also not a purchase order.

In fact, you can look at them as opposites. Where an invoice is sent by the seller to the buyer for outstanding payment after goods have been delivered, a purchase order is sent by the buyer to the seller before anything has been purchased.

The purchase order includes the conditions of the agreement, including the products/services, quantity, and the agreed-upon price. This is an important document to help protect against surprises in changes to the relationship. For example, if the seller changes his prices, the buyer may be surprised when he receives the invoice.

The purchase order helps avoid that. You can look at the summary below to be clear of the differences between purchase orders and invoices.

invoice-vs-purchase-order-invoiceberry (1).png

#3 Avoid confusion by creating clear policies

One of the most important things to have as an entrepreneur, small business owner or freelancer is a clear general policy in place.

These terms and conditions will act as a way to clarify expectations and the rules of doing business with you. They are similar to the purchase order described above, except that they are not only applicable to one situation. They are also more general and apply to all aspects of your invoicing.

In your terms and conditions, you should decide:

  • whether you’ll take any payment upfront and, if so, what percentage
  • how much time you’ll allow for payment to be delivered
  • what the late fees will be, either as a flat fee or percentage of the invoice total
  • what forms of payments you’ll accept

When you create these terms, you’ll be able to avoid a lot of confusion and delays in your invoices.

#4 Different regions have different requirements

Invoicing can be quite straightforward in your own country.  However, when you start selling goods to people across the world, it can be a bit more complex.

Different regions in the world have different invoicing requirements.

In the US, for example, you may or may not need to send an invoice to your clients. There will also be different types of sales tax that goes with your invoices, and it’s always best to talk with a knowledgeable accountant to make sure you are complying.

In Canada and Australia, for example, you will need to apply GST (goods and services tax) depending on the amount of the invoice. Australia has a similar requirement for GST, especially for international businesses selling to residents of Australia.

The UK requires businesses to use a VAT invoice for those businesses that have more than £83,000 in any 12-month period. The EU also requires VAT, but its invoicing process is much more complicated, seeing as you’ll need to check with the customer in the specific EU member state and determine how much VAT needs to be charged.

Whenever you are selling goods or services to customers internationally, it is best to contact the appropriate government bodies or work with an accountant or tax lawyer specializing in internationalbusiness.

#5 There are necessary parts on your invoice

Although invoices are generally different in different locations around the world, they have some necessary parts.

These are:

  • The name and contact information of the seller, including the logo, address, email and phone number
  • The word ‘invoice’ prominently displayed to avoid any confusion
  • A unique invoice number and invoice date to help you with your record-keeping
  • The buyer’s name and contact information
  • A description of the products/services, including the date they were provided, quantities and unit prices
  • The total amount being charged on the invoice (and you may need to include the tax here)
  • The date that payment is due which should optimally be set at 14 days, rather than 30 days to increase payment speed.

#6 You can use it as a marketing tool

Your invoice doesn’t have to be a static document that merely lists the goods that have been delivered and the price.  You can also use it as a marketing tool.

One of the most difficult parts for marketers when they are sending out emails to their subscribers is to get adequate opening rates. The relationship is simple: the more people reading your emails or marketing materials, the more customers you’ll have.

One overlooked aspect of invoices is that they have a very high open rate. When your customer receives it, he or she will open it (hopefully). There is lots of space on the document, and you can use it for many marketing efforts. These include:

  • referral incentives, where you offer your customers a reward if a person they referred becomes a customer
  • customer testimonials, where you can ask customers to provide a testimonial when they are happiest (the moment they receive the product or service)
  • feedback request, which, similar to a testimonial, except that you want to know the parts of your business that can be improved
  • discount codes, which is useful to keep your customers returning, as well as providing rewards for loyal customers

#7 You can automate it

One of the difficulties of finance documents in general, not speaking about invoices, is that they can be quite time-consuming to put together.

For example, if you make your invoices from scratch or download one of many invoicing templates online, you still need to enter the information manually.

This usually means going through your records or, more realistically, emails to find your customer’s details. It also means that you have to have a good system of recording invoices so that you can remember what unique invoice number should go on the next document.

Of course, in this modern world, that doesn’t have to be the case. You can actually save yourself a lot of time and energy by automating the whole process with online invoicing software. The online part here is important for a very good reason—because everything is stored on the cloud, that means you can be anywhere and still do your invoices.

This cloud-based invoicing software is a great tool for many small business owners and freelancers, who can often send off an invoice in a few minutes rather than half an hour per document.

This information about invoicing can allow you to have one thing that business people need: more time. More energy. More freedom to focus on your main business and increase your revenue, rather than stressing out and spending a lot of time on more financial documents.

With proper invoicing systems and knowledge in place, you’ll see just how easy and profitable it can be.

Author bio: Bernard Meyer is Head of Marketing at InvoiceBerry, the online invoicing software dedicated to helping small business owners and freelancers create professional-looking, easy invoices quickly and efficiently.