Open Invoice: Definition and How It Works

What is an Open Invoice? (Open Invoices Meaning)

An open invoice is an invoice that has already been issued by the business, but the customer hasn’t paid yet; in other words, payment is still pending.

When an invoice is issued to the customer and paid within the specified timeframe, the concept of an open invoice no longer applies. However, when it is delayed, and the payment remains pending, it is referred to as an open invoice.

When the customer pays the full amount specified in the invoice, the transaction is complete, and the invoice becomes a closed invoice. The key here is payment status: open invoices are the incomplete payments, and closed invoices are the completed payments.

Importance of Open Invoice

Open invoices directly affect your business’s cash flow and financial stability. It indicates the revenue your business has earned, but not yet received. This makes it essential to track what is owed and when it is due. If open invoices are properly monitored, businesses can plan their expenses, such as rent and payroll, more effectively.

Regularly staying up to date on open invoices reduces cash flow gaps and the risk of overdue payments becoming bad debts. You get clarity on your accounts receivable and make better growth decisions.

Below are some of the key points that explain the importance of open invoices:

• Better cash flow control
• Clear view of pending revenue
• Improved expense planning
• Lower risk of late or missed payments
• Stronger financial decision-making

How Does an Open Invoice Work?

The process for an open invoice begins when a vendor issues an invoice and sends it to the customer who owes them money. Once the customer sends money to the vendor, the transaction completes, and the open invoice is labeled as a “closed” invoice.

Let’s understand how open invoice works in detail.

1. Purchasing Goods or Services

Purchasing goods or services is the first step in understanding how an open invoice works.
Let’s assume you buy some goods from a supplier or receive services for your business. It could be anything from buying bulk electronics to fixing your business’s electrical equipment or addressing any machinery failure.

2. Creating an Invoice

After receiving goods or services, the supplier will send an invoice with clearly specified items you bought or services you received. The invoice will also include the price of each item, the quantity, the total amount, and the payment due date. From here, the invoice is labelled as “open invoice” until the payment is settled.

3. Verifying the Invoice

Once you receive the invoice, make sure to check it against the purchase order (PO) to confirm that no extra costs have been added and that no data is missing. Next, you should consider invoice matching, which is a key part of this verification process. It ensures even minor details are not missed.

4. Prioritizing Payment Deadline

As mentioned earlier, the invoice includes a due date for payment. This signals the need to clear pending accounts payable on time to avoid penalties, maintain vendor trust, and keep payment records clean and up to date.

5. Processing the Payment

To receive payments faster, the supplier can offer payment methods such as online payments, ACH, digital wallets, bank transfers, credit cards, and debit cards. After the payment is successfully received, the supplier’s accounts team marks the invoice as settled. If the payment is not made by the due date, the open invoice becomes a past-due invoice.

6. Closing the Invoice

In the last step, the finance team closes the invoice after the full payment is received and verified. Once the payment clears, the invoice status is updated from open to closed in the system. The payment is then recorded against the invoice, reconciled with bank or payment records, and stored for future reference and audits.

Common Types of Open Invoices

Open invoices are not limited to only one type. Accounting teams in growing businesses can handle multiple types of open invoices. Some open invoices are common, whereas others are rare.

Below are the types of open invoices you must know:

1. Standard Sales Invoices

These are the most commonly found open invoices. A supplier issues a standard sales invoice after goods or services are delivered, with a payment due date, such as Net 7, Net 15, and Net 30.

2. Recurring Invoices

Recurring invoices become open invoices when they are generated for a billing cycle, but payment has not yet been collected. This usually happens when customers are billed monthly or annually, with payment terms rather than instant auto-debit. It keeps the invoice open until payment is received.

3. Pro-forma Invoices

Pro-forma invoices are considered open invoices because they indicate an expected payment, even though they are not final bills. They remain open during the approval stage and help businesses track upcoming revenue before issuing invoices for payment.

4. Partially Paid Invoices

Invoices that are not fully paid are also considered open invoices. When customers pay only a portion of the total amount, and the remaining amount is pending, the invoice remains open.

5. Online Pending Payments

When the customer initiates payment for the invoice online, but it has not completed yet due to technical issues, such as payment failures or verification issues. Until the transaction is confirmed, the invoice remains open.

6. Offline Pending Payments

Invoices awaiting payment via offline modes such as cash, cheques, or bank deposits remain open. Once the payment is received and recorded, it is also considered a closed invoice. This process usually takes a longer time due to manual processing.

7. Progress-based Invoices

This is another type of open invoice, in which invoices are raised at different stages of an ongoing project. Until the payment for a specific milestone is received, invoices remain open. It helps manage long-term projects.

8. Credit-term Invoices

When the payment deadline is extended by agreement in advance between the buyer and seller, credit-term invoices are issued. Throughout the entire credit period, this invoice remains open, which gives more time to customers to make a payment.

What Are Discounts and Fees in Open Invoice?

Discounts and fees play a major role in settling payments of an open invoice. When payments are delayed, some businesses consider applying late fees or penalties to unpaid invoices. If the due date has passed, you can apply a late fee of $10-$20 or a percentage of the total amount, i.e., 5% to 10%. These extra charges encourage clients to pay before the due date.

Likewise, some vendors offer early-payment discounts or flat percentage discounts to encourage payments before the deadline. Businesses that rely on client payments often use this strategy to gain faster cash inflow. You can offer discounts such as 2/10 net 30, 3/10 net 30, or 3/20 net 60 to encourage customers to pay early.

Discounts and fees, when used properly, help businesses manage open invoices more effectively.

Open Invoice Example

Let’s say you are using Moon Invoice for invoicing and want to check which of your invoices are still open (i.e., unpaid). Here’s how you can do it:

1. Open the “Invoice” section in the “Moon Invoice” app or website.
2. Navigate to the “Status” tab.
3. Click on the “Status” to check “Open”, “Paid”, “Overdue”, “Recurring”, “Partial”, and invoices at a glance.
4. Click “Open” to review all open invoices with pending payments.
5. If required, you can edit, customize, and save again with the updated details.
6. Lastly, you can share it via email within the app or print it as a copy to maintain records.

Challenges in Managing Open Invoices for Businesses

If your business is dealing with too many open invoices, it will become difficult to manage them in the long-run. They increase the risk of delays, errors, and poor financial visibility.

Let’s explore the common challenges businesses face with open invoices.

• • Cash Flow Disruptions: Open invoices restrict your business’s incoming cash flow. It becomes difficult to cover major business expenses, such as rent, payroll, and utilities.
  • Manual Data Errors: Missing key invoice details or incorrect invoice number entries are among the primary challenges that lead to disputes, rework, and delays.
  • Payment Delays and Failures: Using an unreliable payment processor can lead to stalled transactions and continuous payment failures.
  • Tracking and Follow-up Issues: Manually tracking every outstanding invoice requires consistent follow-ups and is very time-consuming. It restricts you from focusing on other productive areas of your business.
  • Coordination Gaps: Lack of communication between sales, finance, and accounts payable departments keeps payment issues unresolved, which eventually results in open invoices.

How Moon Invoice Simplifies Open Invoice Management?

Manually managing open invoices is a tough task. The fastest way to simplify managing your open invoices is by using software in your workflow. Moon Invoice is one such example that can help you manage all of your open invoices seamlessly.

In Moon Invoice, if you head to the “invoice” section, you can create a new invoice or import invoices. After creating a new invoice, you can check its status in the status bar. You will be able to check which invoices are “Open”, “Draft”, “Partial”, “Paid”, “Overdue”, “Recurring”, “Void”, or “Credit Notes Applied.”

Beyond managing open invoices, Moon Invoice is designed to help you overcome your invoicing hassles with features such as AI-powered scanning, quick invoice processing, expense and time tracking, recurring billing setup, and financial report generation.

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The Bottom Line

An open invoice simply reflects revenue earned but not yet collected. Keeping a close eye on open invoices helps businesses stay in control of cash flow, avoid payment delays, and reduce the risk of outstanding amounts piling up.

So, when you are running a business, managing open invoices can be a bit challenging if you do it manually. Delayed follow-ups, missed payments, and processing errors are more likely in manual processes. In some cases, it can even take days to process invoices, whereas software can do so in minutes. Plus, using software also ensures you focus more on productivity as it eliminates frequent errors.

If you are looking for software that can help you manage open invoices and keep you ahead of your invoicing tasks, you can consider Moon Invoice. Start your free trial now!

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