You can save yourself (or your accounts payable department) a lot of work by automating many of these steps.
5 reasons for an open invoice
There are many reasons why companies may have open invoices. Below are five of the most common ones.
1. Partial payment
Partial payments of invoices might occur by design or by accident.
For example, many companies work on projects where they don’t request a single payment for a service or order.
Instead, they ask for part of the payment in advance and the remainder on completion of the project.
This kind of transaction can occur for a number of reasons. It’s particularly valuable when a company’s services take place over an extended period – both businesses will then be aware that the incentive is removed if all payment precedes completion of the work.
It could also be because the final total value of the project might be difficult to estimate at the early stage of cooperation, or the precise services to be provided later on are dependent on early performance.
2. Error on the invoice
There could be a problem with some information on your invoice, such as the invoice number, line items, bank details, even the date listed, etc.
In most cases, your client’s accounts department will simply notify you of the error, which you can then correct and return.
In many cases, this will cause a delay in the payments being sent.
3. Disputed agreement
In other situations, an open invoice might occur because the customer is dissatisfied with services rendered or even disputes that the business agreement was kept.
In this scenario, an accounting department may have been instructed only to pay the total amount. Or perhaps there has been a miscommunication between the businesses and a discount on the final balance was promised by a salesperson.
In some situations, the supplier may already expect and agree on what is owed on the bill. In others, they may need to take steps toward a dispute.
4. Accounting department processing time
Each company is different. The accounts department of the business you are working with might take longer to process and transfer funds than others.
This can leave you with an open invoice for longer than you expected. As the vendor, the only real way to deal with this is to contact your customer and track your invoice.
Dunning, or auto-dunning, is one method of tracking accounts payable. You can also request the customer notify you when your open invoice becomes a closed invoice.
5. Payment processing time
Unlike directly paying with cash, delivery of payments for purchases electronically takes time.
How long each payment takes depends on the payment processing provider and the amount that is being paid.
In the majority of cases, bank transfers are instant.
However, banks can delay some transactions, especially if they are for a significant or relatively unusual amount for that company. This is simply part of banks’ due diligence and no reason for alarm.
The time it takes to process a payment will also increase if it is an international payment.
Open invoices are more common than you may think.
Invoices themselves are technically always either open invoices or closed invoices. You can even intentionally assign an open invoice to a customer’s account to provide flexibility with payments and gain an edge over your competition.
However, in practical terms, open invoices are usually the result of an issue with the payment process or a partial payment agreement.
They can come about for a variety of reasons, including errors, disputes, or payment processing issues.
Improving your invoice processing best practices is one way to decrease the likelihood of unwanted open invoices, and so too is automation.
By mastering control of your open invoices, you can improve your business’s cash flow. In the long run, this underpins the success and growth of your business.