Open invoices are invoices that have been issued by a business but have not been paid by the customer. Since these invoices are awaiting payment, they are considered “open” until they are fully paid or settled.

In a 2022 report, 87% of businesses reported that their average invoice is paid after the due date, leaving many invoices open for weeks or even months. Below, we’ll explain what open invoices mean for businesses, how to automate open invoice processes, and how to reduce the number of open invoices.

What’s in this article?

• Why open invoices happen
  
• What open invoices mean for businesses
  
• How to effectively manage open invoices
  
• How to automate open invoice processes
  
• How to reduce the number of open invoices
  

Why open invoices happen

Open invoices can occur for numerous reasons. Here’s a look at some of the common causes of open invoices.

• Late payments: Customers might simply be late in making payments because of their own financial constraints, forgetfulness, or other reasons.

• Payment processing delays: Even with electronic payments, it can take some time for payments to be processed and reflected in a company’s accounts. This delay can cause invoices to temporarily remain open.

• Invoice errors: Invoicing errors like incorrect billing information, pricing discrepancies, or incorrect quantities can lead customers to dispute or delay payment.

• Disputes: Customers might dispute the quality of goods or services received and withhold payment until the issue is resolved.

• Intentional nonpayment: Customers might deliberately avoid paying invoices because of financial difficulties, dissatisfaction with the product or service, or fraudulent intentions.

• Partial payments: Customers might make partial payments toward an invoice, leaving the remaining balance open.

• Administrative delays: Delays in processing payments or recording them in accounting systems can keep invoices open.

• Complex payment terms: Invoices with complicated payment terms or those that require multiple approvals might take longer to process, resulting in longer open periods.

What open invoices mean for businesses

Open invoices can create challenges for businesses. Here’s a look at some of the difficulties they might pose.

• Cash flow management: Open invoices can affect cash flow, especially if a substantial portion of revenue is tied up in receivables. Delays in receiving payments can cause financial strain, affecting a business’s ability to cover its own expenses or reinvest in growth.

• Administrative burden: Tracking and managing open invoices requires administrative effort. This includes sending reminders, negotiating payment terms, and handling disputes, all of which consume time and resources.

• Bad debt risk: There is always a risk that open invoices will not be paid, turning them into bad debts. This risk increases with the length of time the invoice remains unpaid and can lead to financial losses.

• Resource allocation: Businesses need to effectively allocate resources to manage their accounts receivable (AR) and ensure timely payments. This can divert resources from other more productive areas.

How to effectively manage open invoices

Managing open invoices is important for a business’s financial health. Here are some strategies for responding to open invoices.

Issue accurate and detailed invoices

Make sure your invoices are accurate, detailed, and easy to understand. Include all relevant information, such as invoice number, date, payment terms, due date, and contact information. Consider using invoicing software to automate the process and reduce errors.

Set clear payment terms

Clearly communicate payment terms up front, including due dates, acceptable payment methods, and late payment fees. Consider offering early payment discounts to incentivize prompt payment. Be flexible and willing to negotiate payment plans if necessary.

Send invoices on time

Promptly send invoices after goods or services are delivered. Consider using electronic invoicing for faster delivery and easier tracking.

Follow up regularly

Implement a system for tracking open invoices and sending reminders before and after due dates. Use email, phone calls, or other communication channels to follow up on overdue payments. Be polite but firm in your communication.

Use technology

Use accounting software or invoicing platforms to automate invoicing, track payments, and generate reports. Consider integrating with online payment gateways to simplify the payment process.

Provide multiple payment options

Provide customers with different payment options like credit cards, online payments, or bank transfers. Consider using payment processors with recurring billing services for subscription-based services.

Address disputes promptly

If a customer disputes an invoice, investigate the issue promptly and try to resolve it amicably. Be open to negotiating a compromise if necessary.

Consider early discounts or late fees

Offer discounts for early payments to incentivize prompt settlement or implement late payment fees to discourage lateness and compensate you for the inconvenience.

Outsource collections if necessary

If internal efforts to collect payments fail, consider outsourcing collections to a professional agency. Be sure to choose a reputable agency with experience in your industry.

Analyze invoice data

Regularly review invoice data to identify trends, patterns, and potential issues. Use this information to refine your invoicing and collections processes.

How to automate open invoice processes

Automating open invoice processes can streamline operations, reduce errors, and improve cash flow for businesses. Here’s how it works.

Choose the right invoicing software

Choose a reliable invoicing platform to create, send, and track invoices electronically. Look for features such as automatic reminders, recurring billing, and integration with accounting software.

Stripe Invoicing automatically creates and sends invoices to your customers based on their subscriptions, usage, or other triggers and lets you customize the look and feel of your invoices to match your brand. Stripe Billing can manage recurring subscriptions and automatically generate invoices based on your customers’ billing cycles.

Set up automated reminders

Configure your invoicing software to send automatic payment reminders before and after the invoice is due.

Integrate with payment gateways

Connect your invoicing software with a payment gateway. This allows customers to directly pay invoices online, making the process faster and more convenient.

Automate late payment fees

If you charge late payment fees, set up your software to automatically calculate and apply them to overdue invoices. Communicate your late fee policy to customers up front.

Use accounts receivable (AR) automation tools

Consider using specialized AR automation software to manage your collections process. This software can automatically send dunning emails, track payment promises, and escalate collections. Stripe Billing and Stripe Invoicing also offer dunning management tools: Stripe Invoicing automatically retries failed payments, and Stripe Billing has custom dunning strategies to match your business’s needs.

Implement electronic data interchange (EDI)

If you work with large clients or suppliers, consider implementing EDI to automate exchanging invoices and other documents. EDI can greatly reduce manual data entry and processing errors.

Use artificial intelligence (AI) and machine learning (ML)

Some invoicing and AR automation platforms use AI and ML to analyze invoice data and identify patterns. This can help predict which invoices are likely to be paid late and prioritize collection efforts accordingly.

Integrate with accounting software

Integrate your invoicing and AR automation tools with your accounting software. This eliminates the need for manual data entry and ensures accurate financial records.

Build custom integrations

For more complex automation needs, you can use APIs to build custom integrations with your systems. Stripe API gives you programmatic control over all aspects of your Stripe account, including invoices, payments, and customers.

Stripe Automations, currently in beta, is another way to create custom workflows to manage tasks related to invoices and subscriptions. You can define triggers (e.g., invoice created, payment failed) and actions (e.g., send follow-up emails, update customer record) to automate your processes.

How to reduce the number of open invoices

Minimizing open invoices improves cash flow and reduces time spent on tracking down late payments. Here are some strategies that can help reduce your business’s open invoices.

Make invoicing easy

• Automate invoicing: Use automated invoicing software so invoices are sent promptly after goods or services are delivered. Automation eliminates delays caused by manual processing.

• Accuracy: Make sure invoices are accurate to prevent disputes and payment delays. Double-check information about the services or products, prices, and terms before sending the invoice.

Clear payment terms

• Set clear terms: Define payment terms up front, including due dates, acceptable payment methods, and any late payment penalties to set customers’ expectations from the beginning.

• Contracts and agreements: Use contracts or written agreements to make payment terms explicit, especially for large or ongoing projects.

Penalties and incentives

• Discounts for early payment: Offer discounts to customers who pay invoices early. Even a small percentage off can motivate faster payments.

• Tiered pricing: Consider tiered pricing where prompt payments create customer savings over time.

• Late fees: Implement late fees for overdue invoices. Consistently enforce these penalties.

Customer communication

• Regular follow-ups: Send reminders before and after due dates. Polite and consistent follow-ups can greatly reduce delays.

• Open lines of communication: Make it easy for customers to contact your finance team with any invoice queries. Open communication can help quickly resolve disputes or misunderstandings.

Flexible payment options

• Multiple payment methods: Accept various payment methods including credit cards, bank transfers, and mobile payments to make it as easy as possible for customers to pay.

• Payment plans: For larger invoices, offer structured payment plans that allow customers to pay in installations.

Control your credit

• Credit checks: Conduct credit checks on new customers before extending credit. This helps assess the risk of late or nonpayment.

• Credit limits: Set credit limits for new customers and adjust them based on their payment history.

Technology

• Online payment portals: Use online portals where customers can view their invoices and make payments. These portals can also send automatic reminders and updates about invoice status.

• Digital receipts and confirmations: Send digital receipts and payment confirmation to customers immediately after a payment is made, offering them assurance and a record of the transaction.

Legal and collection measures

• Third-party collections: Consider using a collections agency to recover debts from long unpaid invoices.

• Legal action: Legal action might be necessary when all other avenues have been exhausted.