What is an outstanding invoice? How does it affect your business?

What is an outstanding invoice?

An outstanding invoice is the bill that the client hasn’t paid within the agreed-upon time period. It refers to the company’s expected but not yet generated revenue. This kind of invoice is also termed an open invoice, an accounts receivable invoice, or an unpaid invoice.

Let’s understand it through an example. Suppose a company issues an invoice on 1st July that has a due date of 15th July. This invoice will be considered outstanding if the customer does not make payment by 15th July.

What’s the impact of outstanding invoices on the business?

The overall impact of an outstanding invoice on the business is negative. They affect key business operations that are highly dependent on payment flows. For instance, you haven’t received the payment yet, but need to pay your utility bill. In such a case, you need to access your company’s credit, which affects the budget.

Unpaid invoices also affect your payroll and hiring process. Ultimately, your business growth gets stuck. It also prevents you from making essential business purchases.

Another concern is unnecessary administrative burden. The team needs to track, follow up on, and manage all unpaid invoices. It means the team needs to put in extra hours and invest time that could otherwise be spent on other core business activities.

An outstanding invoice leads to financial instability. As a result, it becomes quite difficult for the company to outline or predict its finances.

Lastly, continuous follow-up also affects the business-client relationship. It can create pressure and annoy your clients.

Common causes of outstanding invoices

Understanding the causes helps you address outstanding invoices and take proactive action. Some of the causes are as follows:

Invoicing error

It is quite important to issue a complete and accurate invoice. Any incomplete detail can confuse clients and lead to misunderstanding. Ultimately, this results in an outstanding invoice and delays payment.

Lack of internal communication

Miscommunication within the internal finance team or accounting team also leads to outstanding bills. When the involved parties are not aligned, there may be missing information, unresolved disputes, misunderstandings, or delays in creating or issuing invoices. All these are major causes of unpaid invoices.

System error

Sometimes, the accounting software/invoicing software has a technical glitch that causes invoices to be sent late. This slow invoicing process results in late payments to the company. The system error also results in an incorrect invoice, further delaying payment until the correction is made.

Financial problem on the client’s side

Often, businesses also face late payments due to clients’ financial constraints. Sometimes, customers are not able to pay the invoice due to insufficient funds. Ultimately, vendors/sellers face payment delays and the invoice remains unpaid.

No follow-up on the sent invoice

Many times, clients forget to make the payment. Continuous invoice follow-up is necessary for companies to receive their due on time. It results in unpaid invoices when business professionals do not follow up or send reminders.

Lack of automation

The manual invoicing approach lacks smart handling. It involves manual data entry, poor invoice tracking, and missed follow-ups, resulting in outstanding invoices. However, adopting automation makes it easier to overcome these challenges.

How to prevent outstanding invoices?

You can prevent open invoices by following a strong invoicing process and being careful about a few things while billing.

For instance, you must define clear payment conditions while invoicing. This reduces confusion and enhances on-time payment. Some of the payment terms are as follows:

• Net 15: Payment is due within 15 days of the invoice date.
• Net 30: Payment should be made within 30 days of the invoice date.
• 2/10 net 15: A 2% discount is applicable if the payment is made within 10 days; otherwise, full payment needs to be made within 15 days of the invoice date.

Sending an invoice on time is another important thing you must take care of. The longer you delay invoicing, the greater the chances of late payment. It is always better to send invoices immediately after completing the service.

Offering multiple payment options is another approach to reducing your outstanding invoices. It enhances your clients’ convenience and allows them to make the payment easily without relying on a single payment method. On the other hand, it enhances your payment flow.

Applying late payment fees is another way to reduce the outstanding invoice amount. This encourages clients to make payments on time. In contrast, you can offer a 1% to 2% discount to encourage early payments.

Additionally, you must regularly track invoices to monitor the status of unpaid invoices. You can use invoicing software to automate your payment reminders. This maintains consistent follow-ups without manual efforts.

Key strategies for collecting outstanding invoices

For collecting outstanding bills, you must follow the key strategies below:

Set up a standardized process

Always establish and follow a standardized workflow for handling outstanding invoices. There should be a well-defined process from invoice issuance to final payment collection. A clear, defined process helps ensure consistency. This keeps the workflow smooth and avoids confusion.

Categorizing outstanding invoices

Group your unpaid invoices by their outstanding duration. Common categorizations include 0-30 days, 30-60 days, and 60+ days. This approach helps you to identify the payment that requires immediate attention. This also enables effective follow-up and improves overall cash flow management.

Send timely payment reminders

Follow up on your unpaid invoices and send timely payment reminders. Initially, send a gentle, polite follow-up to urge payment before the due date. Still, if you didn’t get the payment, send another invoice reminder. Remember that you must adopt a well-defined follow-up to collect your outstanding invoice.

Maintain accurate records

Keeping the documents related to the process is another strategy you should follow. It includes invoices, communication documents such as emails, and other related documents. These records help reduce confusion and let the process go smoothly.

Strengthening the client relationship

Maintaining a good relationship with your client is another key strategy you should consider. Your business can receive on-time payments when there is a strong & trusting relationship between you and your clients.

How to chase & handle overdue payments?

An outstanding invoice becomes overdue when the client fails to pay after the payment deadline has passed.

Sending a friendly reminder

Initiate your late payment by sending a friendly reminder. Make sure your tone and language are clear and professional. Here is a typical example of an email:

Perform a second follow-up

If you haven’t heard anything from your client’s end, the next step is to follow up. Send another email after 5 to 7 days, reminding your client about the payment due. Here, you need to be direct and professional in your tone, with a stronger emphasis on urgency.

Use multiple communication channels

Instead of relying solely on email, it is better to use multiple communication channels with your client. You can contact your client by phone or via any messaging app. There is always a positive impact on your payment flow when you set up direct communication with your client.

Offer incentives and flexible payment plans

Offering a discount to your client can be a great way to collect your payments. You can also offer flexible payment planning if your client is struggling to make the payment. Allows your client to pay in installments, especially for large invoices. While negotiating, make sure it doesn’t hurt your company’s financial health.

Charge a late fee

You can impose a late fee for late payments to encourage clients to clear their dues on time. This helps to maintain a consistent cash flow. However, you need to clearly state the terms and conditions for such penalties when issuing an invoice. Establish clear communication with the client for such matters.

Pause the client work

Consider pausing the client work if it is an ongoing project, and your payment is still due. This approach encourages your client to pay an outstanding invoice. Additionally, it saves you time and resources until you are confident you will receive payment.

Contacting professional collection services

Collection services are third parties that collect the debt on your behalf. They work professionally and charge companies a fee for collection. They often work in accordance with the legal and ethical guidelines. However, you should only use this strategy as a last resort, as it can negatively affect your client relationship.

Streamline outstanding invoices with Moon Invoice

Trusted by 1.7M+ global professionals, Moon Invoice helps business owners manage their entire invoicing process in all modern ways. From invoice generation to final payment acceptance, it offers everything as a one-stop solution for businesses of all sizes.

The platform offers 66+ free, customizable invoice templates to create a clean, professional invoice in under a minute. Additionally, it also includes advanced features to handle outstanding billing. You can track invoice status in real time and send automated payment reminders to keep clients informed about unpaid invoices. This saves time and reduces manual efforts.

The system supports 20+ payment gateways and integrations. Thus, you can easily get the payment by offering flexible payment options. You can keep all related documents in one place and manage them on a centralized platform. Also, the system helps to generate business reports to analyze the overall financial performance.

Overall, Moon Invoice enables you to make your outstanding payments faster, more efficiently, and with greater ease.

Final thoughts

Managing outstanding invoices is necessary for maintaining your company’s financial health. You need to adopt a proactive approach to improve payment collection and strengthen client relationships. Follow up with your clients, automate payment reminders, and use invoicing software to save time and improve your invoicing and outstanding billing.

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