An “open invoice” is an invoice issued by a seller but not yet paid by the buyer. It represents an outstanding amount a customer owes for goods or services provided and is considered “open” until full payment is received.

If invoices remain open beyond their due date, they become overdue and require follow-up actions such as payment reminders and even escalation to collections. This is a common issue: a 2022 survey found that more than half of businesses spend four hours or more following up on payments every week. Tracking and managing open invoices properly can help secure more timely payments and reduce the administrative burden associated with collections.

Below, we’ll explain how to manage and track open invoices, how to minimize them, and how to report them for financial statements.

What’s in this article?

• How to manage and track open invoices
  
• What are the risks of having too many open invoices?
  
• How to set clear payment terms to minimize open invoices
  
• How to automate reminders for open invoices
  
• When and how to escalate collection efforts on open invoices
  
• How to report open invoices for financial statements
  

How to manage and track open invoices

Tracking open invoices is an important part of managing your business’s finances. Tools such as Stripe Invoicing can make tracking invoices much simpler. Here’s how.

Stripe Dashboard

The Stripe Dashboard gives you an overview of all your invoices and shows whether an invoice is a draft, open, paid, or overdue, helping you determine where you need to follow up.

Automatic reminders

Chasing clients for unpaid invoices is time-consuming and can be uncomfortable. With Stripe, you can implement automatic payment reminders in advance. This is a polite, automated nudge for customers that helps reduce late payments while saving you time and effort.

Smart Retries

Stripe also makes it easier to handle failed payments. With automatic collection and Smart Retries, Stripe will try to collect the payment again on a fine-tuned schedule if the initial payment fails. This helps minimize manual intervention and can improve your chances of getting paid sooner.

Reporting features

Stripe’s reporting tools track your invoicing activity. You can use metrics such as days sales outstanding (DSO) or look at payment success rates to understand how effectively your invoicing process is running. These analytics can help you spot trends, identify customers who are chronically late, and improve your invoicing practices to minimize open invoices.

What are the risks of having too many open invoices?

Having too many open invoices can create financial instability and impact day-to-day operations. Here are some of the main risks:

• Cash flow shortages: If your clients don’t pay on time, you might not have the liquidity you need to cover your own expenses—payroll, supplier payments, rent, and other operational costs.

• Dependency on external financing: Businesses that have a backlog of unpaid invoices often need to rely on external financing, such as lines of credit or short-term loans. This can add to your costs as you’ll be paying interest and fees, which might erode your margins.

• Difficulty in planning and budgeting: When you have too many open invoices, your financial projections are less reliable. You might be unsure when or if the money will come in, which makes it difficult to make investment decisions with confidence—whether it’s hiring new staff, expanding inventory, or upgrading equipment.

• Increased risk of bad debt: The more open invoices you accumulate, the higher the likelihood is that some will never get paid and become what’s known as bad debt. Customers who take longer to pay might be facing their own financial troubles, which increases the risk that they will eventually default.

• Strained vendor relationships: If you’re unable to pay your vendors on time, they might decide to change their payment terms, put your account on hold, or even refuse to work with you. Losing favorable terms or preferred vendors can disrupt your supply chain and cause additional problems for your business.

• Damage to business credit: Delayed payments to creditors can damage your business’s credit rating. A poor credit score can restrict your ability to find financing in the future or lead to less favorable terms when you do qualify for credit.

• Business disruptions: Having too many open invoices might force you to delay important tasks such as replacing aging equipment, investing in a growth opportunity, or making payroll. These disruptions can impact the quality of your operations, employee morale, and customer satisfaction.

• Lost opportunities: When an opportunity arises—such as a bulk discount from a supplier, a chance to expand into a new market, or the chance to hire a talented new employee—you need cash on hand to seize it. If most of your funds are tied up in unpaid invoices, you might lose out on these opportunities and stunt your business’s growth potential.

To avoid these risks, adopt disciplined invoice management tactics: send invoices promptly, communicate payment terms up front, automate reminders, and be proactive with follow-up communications. Automated invoicing systems can help.

How to set clear payment terms to minimize open invoices

Setting clear payment terms can help reduce open invoices and keep payments coming in. Here’s how to do so:

• Define specific due dates: Avoid vague language such as “due upon receipt.” Instead, include a specific due date.

• Offer early payment incentives: Encourage prompt payment with a small discount such as “2/10 Net 30,” which offers 2% off if the invoice is paid within 10 days.

• Communicate late fees: Be up front about penalties for late payments. This helps deter delays.

• Send detailed invoices: Make invoices easy to understand by including all necessary details such as amount, due date, and payment methods.

• Provide flexible payment options: Include multiple payment options such as Automated Clearing House (ACH) and credit cards. This makes it easier for customers to pay.

• Put terms in writing: Document your payment terms up front in contracts or agreements.

• Send invoices promptly: Send invoices as soon as work is completed to get the payment process started.

• Personalize the communication: Add a polite reminder in your invoice to encourage timely payment, such as, “Prompt payment helps us continue delivering great service.”

How to automate reminders for open invoices

Automating reminders for open invoices in Stripe can help decrease manual follow-ups and increase the timeliness of your payments. Here’s how to do so:

• Log in to your Stripe Dashboard.

• Go to Settings by clicking on the gear icon at the top right corner.

• Under the Billing section, click on Invoicing.

• Scroll down until you see the “Manage advanced invoicing features” section.

• Toggle on the “Send reminders if a one-off invoice hasn’t been paid” option.

• Click “Add reminder” to create a new reminder. You can send it a set number of days before the due date, on the due date, or after the due date, if it’s still unpaid. Creating multiple reminders can help cover your bases.

• Customize your reminder content as you see fit or use Stripe’s default reminder email.

• Hit Save once you’re satisfied with the reminder schedule and content.

When and how to escalate collection efforts on open invoices

In certain situations, it’s necessary to escalate efforts to collect unpaid invoices. You’ll want to start escalation efforts if:

• Invoices are more than 30 days overdue

• Multiple reminders have gone unanswered

• Clients fail to honor agreed payment timelines

Start the escalation process by switching from automated reminders to direct contact, such as a phone call or personalized email. Be firm but empathetic: show that you understand their situation while emphasizing the need to resolve the outstanding balance. If the client is struggling financially, offer revised terms or an installment plan to demonstrate goodwill while ensuring you still receive payments.

If initial escalation efforts are unsuccessful, send a formal letter giving a deadline (typically 7–10 days) for payment. Clearly state the consequences for nonpayment, such as the involvement of a collection agency. Reiterate any applicable late fees or interest charges to encourage prompt payment.

Once invoices are over 60 days overdue, consider hiring a collection agency. But be aware that they take a percentage of the collected amount. Legal action might be the final step for substantial unpaid balances, but reserve this option for when all other methods are exhausted. Escalate gradually and preserve the client relationship wherever possible.

How to report open invoices for financial statements

Open invoices appear on a few different types of financial statements. Here’s how to record them.

Balance sheet

Open invoices are recorded under accounts receivable (AR) on your balance sheet. AR reflects what customers owe you—basically, all unpaid invoices. To account for invoices that might turn into bad debt, establish an Allowance for Doubtful Accounts here. This estimate is reported as a reduction in AR and offers a more realistic view of how much cash you can expect to collect.

Aging schedule

Use an aging schedule that categorizes AR by how overdue the invoices are (e.g., 30 days, 60 days, over 90 days) for a more detailed view. This helps pinpoint cash flow risks and shows how likely it is that you’ll get paid on time.

Income statement

Revenue from open invoices is reported on income statements, because it’s recognized after goods or services are delivered. This follows the accrual accounting principle, which means you record revenue when it’s earned, not necessarily when the money is in hand.

Notes

If a large amount of AR is overdue or at risk, disclose this in the financial statement notes. This keeps stakeholders informed about potential liquidity issues.