Open Invoices Explained: Everything You Need to Know

Understanding what open invoices are is vital for vendors to track client payments and as well as help buyers manage cash flow efficiently. In this article, we'll delve into open invoices, their types, functionality, and the key benefits they bring to financial dealings.

What are Open Invoices?

An open invoice is a detailed document for goods sold or services rendered that remains unpaid. In simple words, it is an invoice that is yet to be paid. It outlines the amount owed and the payment deadline, typically sent by vendors to the company's accounting or accounts payable department to the customer.

Why are Open Invoices Important?

Here are the reasons why open invoices are crucial in business, profoundly impacting a company's financial health and market reputation:

• Cash flow management

Open invoices assist in tracking incoming payments, aiding businesses in maintaining a consistent cash flow to fulfil financial obligations and support growth initiatives.

• Expense management

By keeping tabs on open invoices, businesses can effectively manage their spending, making sure they allocate resources wisely and avoid unnecessary costs.

• Mitigating financial risk

Monitoring open invoices allows companies to address any payment delays or disputes promptly, reducing the risk of financial setbacks and safeguarding their reputation in the market.

Types of Open Invoices

There are several types of open invoices commonly handled by accounting departments, each with its unique characteristics:

Manual, offline pending payments

These open invoices involve payments made through cash, cheques, or bank transfers that are in a "pending" status. While they may need more processing time, they require manual confirmation to complete the transaction.

Online pending payments

Termed as "invoice automation," these invoices are triggered automatically by payment processors when customers initiate online payments. It stays pending if the payment doesn't promptly transfer from the customer's bank account to the vendor's account. These invoices are typically considered low-risk and undergo automatic validation by the online payment system, eliminating the need for manual intervention.

Bills

An open invoice can become a standard bill if it becomes overdue. In such cases, the payment processor reclassifies the overdue invoice as a bill, which stays in the system until it's paid. It's essential to monitor these invoices closely, as they signal potential payment issues on the customer's end, possibly resulting in late fees or penalties.

Incomplete payments

Also referred to as failed payments, these are payments that customers still need to make despite receiving an invoice. Only complete payments can occur for various reasons, such as entering incorrect bank details or needing more funds in the customer's account. Keeping a watchful eye on these open invoices is crucial to address any issues promptly.

How do Open Invoices Work?

Understanding how open invoices work involves several distinct steps in the invoicing process:

Issuing the invoice

The process begins when a vendor's accounts payable department sends an invoice to a customer who owes them money. This document outlines the amount owed and the agreed-upon payment terms.

Invoice verification

Upon receiving the open invoice, the customer's accounting department ensures its accuracy and legitimacy. This involves checking that the invoice matches the terms of the agreement and that there are no errors or discrepancies.

Review for past transactions

Open invoices may include details of past transactions or any outstanding amounts that must be settled. This comprehensive view helps both parties keep track of their financial history.

Handling discrepancies

If discrepancies or issues are identified during the verification process, the customer's accounting or accounts payable department communicates these problems to the vendor for resolution.

Timely payment

Assuming no discrepancies are found, it becomes the responsibility of the customer's accounting department to ensure timely payment according to the specified payment terms on the invoice.

Transition to past-due or closed invoice

If the open invoice is unpaid within the agreed-upon timeframe, it transitions into a past-due invoice. Conversely, if the customer makes the payment on time, the invoice status changes from open to closed.

Reconciliation and audit trail

Once an invoice is marked as "closed," it is reconciled, completing the audit trail for the transaction. This step helps maintain accurate financial records and transparency for both parties involved.

Example of Open Invoices

Consider a scenario where a supplier provides goods or services to a customer. In a given month, the supplier issues three invoices to the customer for the products delivered or services rendered. After verifying payments received, it's found that the customer has paid one invoice promptly. However, the remaining two invoices from that month are still outstanding. These unpaid invoices represent open invoices, indicating that the customer still owes the supplier for the goods or services until they are settled.

Open Invoices vs Closed Invoices vs Overdue Invoices

Open invoices are unpaid or partially paid bills, indicating that payment is pending within an agreed-upon timeframe. These invoices are actively awaiting settlement, often accompanied by specific payment terms like "net 30" or “net 60 days.”

Closed invoices, in contrast, refer to invoices where payments that have been successfully received within the established payment window. They signify completed transactions where the customer has met their financial obligation according to the invoice terms.

Overdue invoices are those that have surpassed their due dates without receiving the expected payment. Deemed as late payments, these invoices require proactive follow-up and collection efforts to secure the outstanding funds. Managing overdue invoices is critical for maintaining cash flow and financial stability.

Best Practices to Manage to Close Open Invoices 

To efficiently handle and resolve open invoices, consider implementing the following best practices:

• Smart contract choices
• Effective communication
• Assertive actions when needed

Understanding open invoices is pivotal for a thriving business. These financial records significantly influence your incoming funds, client relationships, and financial robustness. Businesses can confidently handle their financial responsibilities by recognising their diverse categories, understanding their functioning, and employing effective management techniques.