In running a business, there may be activities and transactions that feature terminologies that are quite confusing. However, the confusion shouldn’t stop or hinder daily business operations. Having a clear understanding of day-to-day business terms and their corresponding usage is essential for fundamental growth. That’s why a deeper understanding of the major differences between a credit memo and an invoice is also crucial.
Both of these terms are important as they are your common business terminologies that you come across every day. Getting familiar with both credit memo and invoice will help you have a clearer vision about each term and their practical usage in the world of business. Continue reading to learn more about the credit memo and invoice.
What is an Invoice?
An invoice is a list of items for which a customer or company has to make payments to its suppliers, service providers, or vendors. The accounts payable department receives invoices from the suppliers or vendors and assesses it before processing for payment. The company issues a ‘Purchase Order‘ (or PO) to the vendor, requesting the items to be supplied to them. The Accounts Payable department will then match the items listed on the PO with the invoice to verify that all the items that they receive are on the list. An invoice also serves as proof that a company or customer has received the items they have ordered and that they are to pay for the corresponding prices.
What is a Credit Memo?
So, what is a credit memo? At this point, you are already aware of what an invoice is and its role in your business. If an assessment has been made and everything is perfect, the items on the purchase order will match exactly with that of the invoice. Once products are received, the invoice is then processed for payment. Keep in mind that a credit memo should not be mistaken with a debit memo. Debit memos are different types of documents which will be tackled in a different topic.
However, if there appears to be any disparity or inconsistency, such as the items received are not in good condition or those wrong items are supplied, the items will be returned to the supplier. Once this happens, a credit memo – otherwise known as a credit note – is issued.
Once the buyer returns items, the vendor will need to issue a credit memo for the returned items. Credit memos are also issued once the client has paid advance payments to the vendor. This document ensures that the vendor has been informed about the discrepancy in the supplying and agrees to the credit memo requested by the customer for the items not supplied exactly through the purchase order.
With all that said, what’s the role credit memos and invoices? The Accounts Payable Department of a company will use both the invoice and credit note for the payment processing. It will then deduct the amount of the credit memo from the invoice and clear the payment for the vendor.
How To and When Use a Credit Memo
As you may have learned by now, a credit memo is a useful tool for small business owners, It’s also particularly useful to both the seller and the buyer. According to Paychex, these are the several instances where a credit invoice might prove useful.
Returned Goods
Of course, we need to mention first the most fundamental use of a credit memo, which is to acknowledge returned goods. If a customer returns goods that were billed previously, the vendor can issue a credit memo to adjust the amount due from the customer. Credit memos are essential to both the buyer and seller. It’s essential not only for tracking payables and receivables but also for recordkeeping and inventory tracking purposes. It’s an excellent practice since it clearly states the reason for the credit memo for the return. For instance, both the customer and vendor will know if the product was spoiled or defective, or if the customer was simply unsatisfied with the product.
Pricing Disputes and Inconsistencies
There are instances when a buyer contests the price that they are billed. This situation can be resolved by means of an informal agreement between the parties, minding mediation, or a legal proceeding. If the result is a reduction in the price that’s invoiced initially, a credit invoice will then be issued. That makes it extremely useful for small business owners who are looking to settle any pricing disputes.
Promotional Discounts
In other cases, the seller may wish to give one particular buyer a break on the costs that were originally billed. This strategy is to establish goodwill and customer loyalty.
Errors with the Original Invoice
In other instances, the issuer makes an error in creating the invoice. In that case, a credit memo is the easiest way to resolve this situation. By issuing a credit note, business owners will be able to determine the exact invoice amount. They won’t have to use any accounting software since the credit memo already outlines the adjusted rate of the total payable amount.
Balance Write-Offs
A credit note will be issued if balancing isn’t accurate. Sometimes, a credit invoice can be used as an internal memo, which is also used to make adjustments to the accounts receivable balances. This issue might occur when a debt becomes uncollectable, and the seller removes the outstanding balance. This is also possible if a customer sends a payment that’s a little short and the seller will not collect it.
What’s Included in a Credit Memo?
In its simplest form, a credit memo is a letter that outlines all of the reduction in sales. However, for it to be effective, it needs to contain several parts and elements. That way, the credit memo will be filled with the necessary information that will serve as proof of the changes in the pricing of the goods. Here are some of the things that should be included in a credit memo:
- Start with the heading. Write down, ‘Credit Note,’ ‘Credit Invoice,’ or the standard ‘Credit Memo.’
- Mention the value that will be reduced from the invoice versus credit note invoice.
- The credit invoice must be issued within a period of one month of the agreement.
- Your credit note for the invoice should also have an identification number, as well as an issuing date. Don’t forget to mention the company name and address, as well as the VAT number.
- Mention the name and address of the supplier or vendor that you’re crediting.
- State the reason for issuing a credit note.
- Add the total net amount for the purpose of the credit (excluding VAT).
- The rate of applicable VAT and the amount to be credited under VAT.
- The gross amount of credit, including any applicable VAT.
These nine items are the complete process of generating a credit note for your customers. Always keep them in mind so that the next time you are creating a credit memo, you’ll know what to include. Credit notes will mention multiple items, so make sure you include everything mentioned above.
How Recurring Billing Integrates Both Credit Memo & Invoice
Incorporating a recurring billing strategy into your business can be a beneficial and convenient way to integrate credit memos and invoices seamlessly. As you may already know, both credit memos and invoices are different things. They are two ends of the spectrum that serve separate purposes. But that doesn’t mean they don’t relate to each other.
An invoice is a document that consists of an itemized list of the items being purchased. On the other hand, however, once an error is made, the credit memo will then be used to resolve the issue. With recurring billing, you can make the process of creating and sending an invoice, as well as sending a credit memo, simpler and quicker for you and your client.
ReliaBills can help you set up a recurring billing strategy that will include credit memo creation and scheduling. ReliaBills and its entire invoicing system are built and designed specifically for recurring billing. It can help create professional-looking invoices, onboard new customers, create specific pricing packages, and automatically bill your customers.
You can save a ton of time by having your invoices generated and sent automatically. You can even create a credit memo and have it automated whenever you need to send one to a customer. Creating one would be similar to creating an invoice. The only difference is that you’ll need to change the heading to ‘Credit Memo.’
Why Recurring Billing?
One of the essential reasons recurring billing is popular is that it benefits both the business and its customers. With ReliaBills and its recurring billing, your customers will only need to set up their payment details once instead of repeating the process every time they transact with your business. Once they’ve set their payment info, your customers can now enjoy the service needing to actively make the payment again or deal with any lock-in contracts.
On the other hand, your business will get steadier and more predictable cash flow and revenue and potential savings on staff and administrative resources. At the same time, you can also enjoy the following perks:
Reduced Late Payments
Recurring billing will reduce the potential loss of funds and administrative costs associated with chasing late or nonpayments. This system gives your business the advantage in any situation.
Avoid Awkward Conversations With Customers
With a recurring billing system up and ready, you can focus more on creating better relationships with your customers. Instead of reaching out to them about late payments, you can make positive interactions about your products or services and cultivate a better experience for your customers.
Security
Recurring billing utilizes safe and secure payment gateways that utilize tokenization and follow proper PCI compliance standards. These processes will ensure that customer data is 100% secured in every transaction they make with your business.
Increase Customer Retention
At the end of the day, the goal is to earn profit and grow your business. You can do so by retaining as many customers as you can. With recurring billing, you can set automated payment processing to ensure maximum convenience and peace of mind for both you and your customer. So not only will your customers enjoy the products/services you offer, but they will also find it convenient to pay you whenever they receive your invoice.
Whether you want to automate your invoice, credit memo, or both, ReliaBills will make your life much more accessible and convenient. For information about ReliaBills and its awesome recurring billing process, click here.
Wrapping Up
So as you can see, both invoices and credit memos are completely different from each other. However, they are still related to each other. Invoice is the list of all the items being purchased, while the credit memo is a document that is issued once an invoice goes wrong. As someone who is running a business, you must be aware of these terminologies. That way, you will be aware and familiar once you come across each one during your daily transactions.
