What Is An Open Invoice, How It Works With Examples

Introduction

An invoice plays a critical role in the world of business; it is a document that requests payment in exchange for goods or services, helping businesses record their financial transactions. Until an invoice becomes due, it remains open and is known as an open invoice statement. 

Every business must keep track of its open invoices. Why? Because it helps businesses keep track of their cash flow and monitor the amount the client owes to them.

But what is an open invoice, and how does it work? Read on to find out.

What is an Open Invoice?

An open invoice, also known as an outstanding invoice, is an invoice that is sent to the customer but hasn’t been paid yet. Basically, any invoice that is generated by the supplier and has not been paid by the buyer until the due date is an open invoice. It plays a key role in the accounting cycle.

Let’s say you buy something from a store; they’ll give you a receipt saying how much you owe them. Until you pay that bill, it’s considered an open invoice. It’s like a reminder to settle the money you owe. Businesses use open invoices software to keep track of who still needs to pay them. It’s just a way for them to keep track of incoming and pending payments. 

Importance of Open Invoice

Tracking open invoices is crucial for managing cash flow effectively for both buyers and sellers. It allows businesses to keep tabs on amounts owed, due dates, and any associated fees or discounts. This data enables companies to maintain stable cash flow and make informed financial decisions.

For buyers, staying on top of open invoices prevents missed payments and excessive debt accumulation, while sellers rely on this information to forecast incoming payments accurately. Effective management of open invoices contributes to a healthy financial outlook and long-term success. Conversely, neglecting unpaid invoices can lead to cash flow problems, strain supplier relationships, and hinder future business opportunities.

How Does An Open Invoice Work?

An open invoice is a document that is sent to the customer once the purchase of goods is done. Let’s understand how an open invoice works with an example.

Purchase of Goods/Service:

First, let’s say you buy something from a supplier or receive a service. It could be anything from getting supplies for your business to hiring someone to fix your computer.

Invoice generation:

After you’ve received the goods or services, the seller sends you an invoice. This is like a bill that says how much you owe for what you got. It includes details like the items bought, the prices, and when the payment is due.

Receipt of invoice:

You receive the invoice and review it to make sure everything looks right. You want to double-check the items listed and the total amount due to ensure it matches what you expected.

Payment due date:

The invoice has a due date, which is when you need to pay it by. It’s like a deadline to settle up the bill. The due date is usually a few weeks after you receive the invoice, giving you some time to gather the money.

Payment processing:

When the due date rolls around, it’s time to pay up. You can use various methods like sending a check, making an online payment, or even doing a bank transfer. Once you’ve paid, you mark the invoice as settled.

Invoice closed:

Once the payment is received, the invoice is considered closed. The seller updates their records to show that you’ve paid and everything’s sorted out.

7 Components of Open Invoice 

An open invoice is typically the same as a usual one generated every time there’s an exchange of goods or services, and the components are the same, too.

1. Invoice Number: Every invoice has a unique number to identify it. It’s like a serial number for that particular bill.
2. Date: This shows when the invoice was issued. It helps keep track of when the payment is due.
3. Due Date: The due date tells you when the payment needs to be made. It’s like a deadline for settling the bill.
4. Description of Goods or Services: This part describes what you bought or what service was provided. It’s a list of things/ services for which you’re paying.
5. Quantity and Price: It tells you how many of each item you bought and how much each one costs. This helps you check if everything adds up correctly.
6. Total Amount Due: This is the grand total of all the items you’ve bought or services you’ve used. It’s the amount you need to pay in total.
7. Payment Instructions: Sometimes, invoices include details on how to make the payment. It could be a bank account number for a wire transfer or instructions for paying online.

Examples of Open Invoice

The list of open invoices is generally included in an Invoice Aging Report of the Accounts Receivables department. It consists of the list of open invoices pending from different customers. Moreover, it also includes details such as the due date, total amount, and the number of days by which it is overdue. 

Invoice Aging Report

6 Common Types of Open Invoices 

1. Standard open invoice:

   This is the most common type. You buy something, whether it’s a product or a service, and the seller sends you a bill. You review it, make sure everything looks right, and then pay the full amount by the due date. It’s like the basic building block of invoicing.

2. Recurring open invoice:

   Think of your monthly subscriptions – things like streaming services, magazines, or gym memberships. Every month, you get the same bill for the same amount until you decide to cancel. It’s handy because you don’t have to remember to make a new payment each time; it happens automatically.

3. Partial open invoice:

   Sometimes, you might not have enough money to pay the full bill right away, or maybe you want to spread out the payments. In that case, you might pay part of the bill now and the rest later. This creates a partial open invoice. It’s like paying in installments instead of all at once.

4. Past due open invoice:

   Past due invoice is when you miss the payment deadline. Let’s say your bill was due on the 15th, but you forgot to pay until the 20th. Now, your invoice is past due. Depending on the terms, you might have to pay extra fees or interest for being late.

5. Adjustment open invoice:

   Sometimes, mistakes happen. Maybe you were charged for something you didn’t receive, or the amount on the bill was wrong. An adjustment open invoice is created to fix those errors. It’s like hitting the rewind button and making things right again.

6. Incomplete payments:

   Incomplete payments occur when a customer fails to complete payment after receiving an invoice. This can result from errors in bank information entry or insufficient funds. It’s crucial to monitor such invoices closely.

6 Major Challenges in Processing Open Invoices 

Managing open invoices can be tricky business for finance teams. Here’s a rundown of the hurdles they might face and how to tackle them:

Overflow of open invoices:

Limited staff can get overwhelmed by a flood of invoices, leading to delays in processing. This can cause cash flow problems for suppliers and potential insolvency risks for buyers.

Time-consuming collections:

Suppliers spend precious time chasing overdue payments, impacting their operations. Rescheduling payments or employing third-party collection services can help, but it eats into profits.

Invoice discounting dilemma:

When sellers need cash fast, they may turn to invoice discounting services, which advance money in exchange for a cut of the invoice. While it’s a quick fix, it eats into long-term profits.

Penalties for overdue invoices:

Vendors may slap fines on tardy customers to cover agency fees and other costs. It’s a way to recoup losses caused by late payments.

Credit line abuse:

Buyers risk overdrawing credit lines by accumulating too many open invoices. Suppliers extend credit lines as a gesture of trust, but repeated delays in payment can strain the relationship.

Manual processing mishaps:

Handling open invoices manually is error-prone and time-consuming. Typos, misplaced documents, and other human errors can drag out the process, delaying payments further.

By being aware of these challenges and implementing strategies to address them, finance teams can streamline their open invoice management and mitigate risks effectively.

How HighRadius Can Help You Close Your Open Invoices Faster

HighRadius’ Electronic Invoice Software  enables enterprises to deploy a self-service portal for their customers to review and pay bills online. Self-service enabling customers and eliminating paper invoices has a proven track record of reducing operating expenses by at least 30%. Additionally, enabling customers to pay online via credit card, ACH, or eCheck can reduce DSO by almost 10%. A cloud-based solution available as Software-as-a-Service, Electronic Invoicing Software is easy and cost-effective to deploy and maintain.

FAQs

1) What is an open purchase invoice?

An open purchase invoice is a document received by a buyer from a seller for goods or services purchased on credit. It is a financial liability that the buyer owes to the seller until it’s paid. The invoice remains “open” until the buyer settles the payment.

2) How do you write an open invoice?

To write an open invoice, follow these steps:

• Include your business name, address, & contact information.
• Add the customer’s name, address, & contact details.
• List the goods or services provided.
• Mention the total amount, including any taxes or fees.
• Specify the payment terms.
• Provide instructions for payment methods.
• Save a copy for your records & send the invoice to the customer.

3) What is an open invoice in SAP?

In SAP (Systems, Applications, and Products in Data Processing), an open invoice refers to an unpaid invoice that remains outstanding in the system. It represents a financial liability for the company until it’s paid. SAP often includes features for managing open invoices, such as tracking payment statuses and reminders for overdue invoices.

4) What is the difference between an open invoice and an overdue invoice?

An open invoice is a bill that is currently unpaid but still within the payment terms specified by the seller. It’s considered outstanding but not yet overdue.

An overdue invoice is a bill that remains unpaid after the due date specified on the invoice. It may incur late fees or interest charges.

5) What is open invoice testing?

Open invoice testing is a type of software testing conducted to verify the accuracy and functionality of systems or applications that handle invoices. It involves testing various scenarios, such as creating invoices, updating invoice statuses, processing payments, and generating reports.