Jul 13, 2022

What Is an Open Invoice and Why It Matters

by Arielle Kushner

open invoices

Open invoices are an unavoidable aspect of working with contractors and suppliers. Knowing how to handle them properly is important for both the vendor, who needs to keep track of which clients have already paid, and the buyer, who needs to take control of cash flow and avoid missing payments.

Most of us are already familiar with the concept of invoices. They’re documents used by a vendor to request payment in exchange for goods and services sold to a client. You can think of it like the check at the end of dinner at a restaurant.

What Are Open Invoices?

In contrast to most restaurants that expect payment immediately, business transactions are a lot more complicated. They can involve large sums of money or have payment schedules according to the terms of the contract between the vendor and client company.

An open invoice, also known as an outstanding invoice, is one that has been sent from the vendor to the client but has yet to be paid. Payments are usually delayed this way by the accounting department of the client organization in order to boost cash flow.

The amount of time it takes for an invoice to go from open to closed depends on the payment terms of the contract between the two companies. If you’ve ever seen terms like “net-30” on a contract, then it means you have 30 days to send the payment and close the invoice.

Why Should You Pay Attention to Open Invoices?

How well you handle your open invoices affects both your cash flow and your reputation in the market. Open invoices matter because:

  • Cash flow matters: Both the vendor and client use outstanding invoices to take control of cash flow. No matter how much income is coming in, you need to have enough cash on hand at any given time to address immediate needs. A U.S. Bank study once found that 82% of small business failures are due to poor cash flow management.
  • Managing them can be expensive if you aren’t prepared: The accounts payable or receivable departments should have open invoices in mind when conducting business financials. Otherwise, they risk causing disputes and generating debt due to poor management.
  • There’s plenty of financial risk if you neglect them: Much like a credit card, most suppliers and contractors have credit limits for individual client companies. If you delay repayment of an open invoice too long, one might stop accepting orders from you until the pending transactions are closed.

The idea here is that open invoices can impact your business both directly and indirectly. It can contribute to your cash flow if done right but also give you a bad reputation for having poor credit in the market if done poorly.

In extenuating circumstances, open invoices that haven’t been closed in a long time will result in the vendor consulting with a collection agency to collect the payment, which is certainly a bad sign for the client’s future business prospects.

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Open vs. Overdue Invoices

The distinction between open invoices and overdue (also known as past due) invoices is significant, even though many mistakenly use the terms interchangeably.

An open invoice is unpaid but has not hit the payment deadline yet and can still be fulfilled according to the terms of the contract. An open invoice becomes an overdue one once that payment deadline has passed.

What Does the Lifecycle of an Open Invoice Look Like?

Let’s go over how open invoices work and how they are processed. In a typical scenario where a vendor sends an invoice to a customer for goods or services provided, the following may occur:

  • The customer’s accounting department will verify the accuracy of the invoice using an invoice-matching process. Any discrepancies will result in the document being sent back to the vendor for re-issue.
  • Once accepted, the open invoice remains open until the agreed-upon payment deadline specified in the contract terms.
  • If the payment is not made in time, the open invoice becomes past due. If it is paid on time, then it’s now a closed invoice.

For obvious reasons, it’s in your best interest to make sure open invoices don’t become past due whenever possible.

The Structure of an Open Invoice

The components and layout of an open invoice are practically the same as those of any “regular” invoice since all invoices technically start out as open before they’re paid. The information you’ll find on such a document includes:

  • An invoice or purchase order identifier
  • The name and contact information of both parties
  • Descriptions and amounts of goods and services rendered
  • Payment terms like due dates
  • Dates when invoices were published and when deliveries are completed

Of course, other information can be included as well given the circumstances. Contract payments made in installments, for instance, would have an extra section detailing previous and future payments to be made.

What Types of Open Invoices Are There?

A wide range of invoice types exist, and that variety extends into the open invoices as well. Those working in accounting departments will run into some of the following.

  • Bills are essentially past due invoices. They require special attention, as their existence is a sign that payment issues are present. The buyer may be charged late fees for these invoices.
  • Incomplete payments also trigger open invoices. They occur whenever a payment has been attempted but has not succeeded for any reason, such as incorrect bank details or insufficient funds. Much like bills, these open invoices require special attention to make sure that they are eventually addressed.
  • Manual pending payments: These outstanding invoices must be manually confirmed in order to be paid. They can involve cash, check, or bank transfer.
  • Invoice automation: Some payment processors use online payment platforms to handle open invoices and automate money transfers. These systems have the lowest risk as they do not require manual action in order to fulfill payments.

It shouldn’t be a surprise that invoice automation, being one of the newer versions of open invoice processing, is the ideal solution to use.

The Challenges of Working with Open Invoices

Clients need to manage their outstanding invoices carefully to avoid significant cash flow issues.

  • Cash flow: Having too many open invoices at once means that you owe money for a lot of transactions, which can lead to insolvency and an inability to make payments on time. To prevent disruptions in your business processes, you need a formal approach to invoice management.
  • Contract complexity: Unpaid open invoices can result in late payments and fees, but early payments might be rewarded with discounts. It all depends on the contract terms of the transaction, which need to be understood fully during invoice management procedures.
  • Getting paid on time: From a vendor or contractor’s point of view, the glaring issue with open invoices is the possibility of not getting paid on time for products or services rendered.

A short-term solution clients can use is consulting with an invoice discounting service, where a third-party company pays for the open invoices but asks for a percentage of the invoice amount in the end. However, this option is costly, and the only long-term answer to open invoice woes is proper invoice management policies.

Tips and Strategies for Accelerating the Closing Process

The closing process for an invoice takes work from both sides of the transaction. The buyer consults with its accounts payable department to record the debit, and the seller records a credit under accounts receivable. Both parties keep track of the financial records for recordkeeping and auditing purposes later.

But what happens if outstanding invoices don’t seem to get paid on time? This predicament causes headaches for both the vendor and client, so a few best practices to help push the closing process along include the following.

  • Choose your contracts carefully: Choose contracts that allow for multiple payment methods, such as cash, check, or online bank deposit. The payment terms could include advance payments to make sure money is moving during long-term projects. And the classic late fees and early payment discounts can also be used here.
  • Enable communication: Whether you’re the seller or buyer, make communication a priority by sending out courtesy reminders or making a call directly whenever an open invoice has been sitting out for too long. There’s always the more explicit option of sending out an overdue invoice with a large “Overdue” stamp in bright red.
  • Get pushy when things get ridiculous: The real world doesn’t always work out the way we expect it to. When a client refuses to close an invoice on time, don’t be afraid to start getting pushy. You can deny further services until open invoices are paid, hire a debt collector to go after your outstanding invoices, or even call your lawyers to initiate legal action.

Start Tracking Open Invoices with Payment or Accounting Software

It can be daunting for businesses to face a stack of unpaid invoices. How can you ensure that your cash flow is enough to handle all the payment deadlines? And if you’re a seller, what can you do to make sure you get paid for your work?

The solution to better invoice management across the board is the adoption of accounting software to streamline and automate the more tedious aspects of the job. Don’t let an outstanding invoice slip by and become an overdue one — take advantage of accounting software today and leave no stone unturned when it comes to your business’s financials.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

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