What Is an Open Invoice? – Examples & How It Works

What Is an Open Invoice?

An open invoice refers to an unpaid invoice where the payment is still due. It is a bill that a business has sent to a client or customer but has not yet received payment for. Tracking open invoices is crucial for managing outstanding payments. It helps businesses monitor pending dues, follow up with clients on time, and avoid payment delays. Without proper tracking, businesses may struggle with cash flow issues and uncollected payments, which can impact overall financial health.

Importance of Open Invoices in Business

Open invoices play a critical role in managing cash flow, accounting, and revenue forecasting. They provide businesses with a clear view of pending payments, accounts receivable, and overall financial health. By tracking open invoices, businesses can predict expected revenue, assess financial stability, and make informed budgeting decisions.

For small businesses, late payments can create serious cash flow issues, making it difficult to pay employees, suppliers, or overhead costs. Larger businesses may have more financial flexibility, but consistent payment delays can still disrupt financial planning and investments.

Actively monitoring open invoices helps businesses identify overdue payments, send timely reminders, and maintain a steady cash flow. Without proper tracking, companies risk revenue losses and increased financial uncertainty.

Example of an Open Invoice

Suppose you are a freelancer offering graphic design services. You complete a project for a client and send an invoice on March 1st with a payment due date of March 15th. Until the client makes the payment, this remains an open invoice.

For example, your invoice might include:

• Service Provided: Logo Design

• Invoice Date: March 1st

• Due Date: March 15th

• Total Amount: ₹10,000

• Payment Status: Open

If the client pays on March 10th, the invoice is marked as paid and closed. However, if the payment is delayed, you may need to send reminders. For businesses, tracking such open invoices helps maintain cash flow and avoid overdue payments.

How Does an Open Invoice Work?

1. Purchase of Goods/Services

A customer buys goods or services from a business, such as office supplies, consulting, or digital services.

2. Invoice Generation

After completing the transaction, the business issues a GST invoice that includes:

• Invoice number for reference

• Details of goods or services provided

• Total amount due, including applicable taxes like GST

• Payment terms (e.g., Net 15 or Net 30)

• Due date by which payment must be made

3. Receipt of Invoice

The customer receives the open invoice and verifies the details. If any discrepancies are found, they may contact the seller for clarification.

4. Payment Due Date

The invoice mentions the deadline by which the payment should be made. Until then, it remains open in the seller’s records.

5. Payment Processing

When the due date approaches, the customer processes the payment using available methods such as bank transfers, UPI, or online payment portals. If paid on time, the invoice is marked as settled.

6. Following Up on Unpaid Invoices

If the invoice remains open past the due date, the business takes steps to ensure timely payment:

• Sending reminders through email or SMS before and after the due date

• Making follow-up calls to confirm payment status

• Offering flexible payment terms if the customer is facing financial difficulties

• Imposing late fees or penalties if payment is significantly overdue

• Escalating the matter to a collection agency or legal process if necessary

7. Invoice Closure

Once the payment is received, the business updates its records and marks the invoice as closed.

By effectively tracking open invoices and following up on unpaid ones, businesses can maintain a steady cash flow and avoid financial disruptions.

Common Types of Open Invoices

1. Manual & Offline Pending Payments

These invoices result from payments made via cash, cheques, or demand drafts that have not yet been processed. Since these methods require manual verification, businesses may face delays in cash flow reconciliation and risk of misplaced or untracked payments. If not recorded properly, they can create accounting discrepancies.

2. Online Pending Payments

Digital payments made via UPI, credit/debit cards, or net banking may remain pending due to processing delays, transaction failures, or system issues. This can lead to uncertainty in cash flow and difficulty in financial forecasting, as businesses cannot rely on funds that have not yet been settled.

3. Bills

Open invoices that remain past due are often categorised as bills, signalling potential delays in customer payments. These overdue invoices can impact a business’s cash flow and financial planning, making it essential to track them closely. If customers fail to settle outstanding balances on time, businesses may need to apply late fees, penalties, or take further collection actions to recover the dues.

4. Incomplete Payments

Incomplete payments occur when a customer has received an invoice but has not successfully made the payment. This can happen due to various reasons, such as incorrect bank details, insufficient funds, or transaction failures. Unresolved incomplete payments delay cash flow, increase outstanding dues, and require active follow-ups to ensure successful settlement.

Discounts & Fees

Businesses use discounts and late fees to manage open invoices efficiently and encourage timely payments. Offering early payment discounts is a common strategy to improve cash flow and reduce outstanding receivables. For instance, a business may provide a 2% discount if payment is made within 10 days, even though the full amount is due in 30 days.

On the other hand, late payment fees act as a deterrent against overdue invoices. Businesses may impose a fixed penalty or charge interest on outstanding amounts if payments are delayed.

Both discounts and late fees play a crucial role in shaping customer payment behaviour. Offering discounts motivates customers to pay early, helping businesses maintain a steady cash flow. At the same time, late fees discourage delays, ensuring that payments are made on time.

Open vs. Overdue Invoices

An open invoice is an unpaid invoice that is still within its due date. It represents a pending payment that the customer is expected to clear on time. If an open invoice remains unpaid beyond its due date, it becomes overdue. Once overdue, it signals delayed cash inflow and may require follow-ups or penalties.

Tracking both separately is crucial. Open invoices help businesses forecast revenue, while overdue invoices indicate payment risks. Regular monitoring ensures timely reminders for open invoices and necessary action on overdue ones to maintain cash flow.

The Lifecycle of an Open Invoice

An open invoice progresses through multiple stages before it is fully settled. Proper tracking and follow-ups are essential to ensure timely payments and maintain steady cash flow.

The key stages in the lifecycle of an open invoice are:

1. Invoice Generation: The business issues an invoice with all necessary details, including amount due, GST, and due date.

2. Receipt of Invoice: The customer reviews the invoice and verifies its accuracy.

3. Payment Due Date: The invoice remains open until the due date specified in the payment terms.

4. Payment Processing: The customer makes the payment via bank transfer, UPI, or other methods.

    5. Following Up on Unpaid Invoices: If the payment is delayed, the business:

• Monitors invoices using accounting software or invoicing platforms to track due and overdue payments.

• Sends reminders via automated emails, SMS, or phone calls before and after the due date.

• Follows up actively by offering flexible payment terms, imposing late fees, or escalating collection efforts if necessary.

6. Invoice Closure: Once the payment is received, the invoice is marked as closed in the business’s records.

Automation can help businesses track invoices in real time, identify overdue payments, and reduce manual effort in follow-ups. By monitoring each stage carefully, businesses can minimise late payments, improve revenue collection, and maintain financial stability.

Challenges with Open Invoices

1. Delayed Payments

One of the most common problems businesses face is customers not paying on time. Late payments create cash flow gaps, making it difficult to cover operational expenses like salaries, rent, and supplier payments. To overcome this, businesses can:

• Set clear payment terms with penalties for late payments.

• Send automated reminders before and after the due date.

• Offer early payment discounts to encourage prompt payments.

2. Tracking Problems

Without a proper system, businesses struggle to track unpaid invoices, leading to missed follow-ups and uncollected payments. Manual tracking can result in errors, making financial reconciliation difficult. Solutions include:

• Using invoice tracking software to automate reminders and payment monitoring.

• Maintaining detailed records of issued invoices and due dates.

• Implementing real-time dashboards for a clear view of outstanding payments.

3. Disputes & Errors

Customers may refuse to pay if an invoice has mistakes, such incorrect amounts, duplicate invoices, or missing details, leading to delayed payments and trust issues. Resolving these disputes can delay payments and impact trust. To prevent this:

• Ensure invoices are accurate and transparent before sending.

• Have a clear dispute resolution process in place.

• Respond promptly to customer queries to avoid prolonged delays.

From Open Invoice to a Closed One

Here’s how businesses convert an open invoice to a closed one:

1. Monitor Payment Status

Once an invoice is sent, businesses track its status and set reminders for the due date. This helps in identifying unpaid invoices early and taking timely action.

2. Follow Up on Overdue Payments

If a payment is delayed, businesses send email reminders, SMS alerts, or phone calls to notify customers. Some may offer early payment discounts or impose late fees to encourage timely payments.

3. Use Automated Tools

Businesses use invoice tracking software to send automated reminders, monitor payment statuses, and generate reports. This reduces manual effort and ensures efficient payment collection.

4. Process Final Payment

Once the payment is received, businesses verify the transaction details to ensure the correct amount has been paid. This step prevents errors and discrepancies.

5. Reconcile and Close the Invoice

After confirming payment, businesses update their records, mark the invoice as paid, and issue a receipt if needed. This final step ensures financial accuracy and completes the invoicing process.

Conclusion

Open invoices are essential for tracking outstanding payments and managing cash flow. Businesses must monitor invoices, send timely reminders, and follow up on unpaid dues to avoid financial disruptions. Automating the invoicing process improves efficiency, reduces delays, and ensures smooth operations.

Frequently Asked Questions (FAQs)

1. What is an open purchase invoice?

An open purchase invoice refers to an invoice received from a supplier that has not yet been paid. It represents an outstanding liability in the business’s accounts payable until the payment is made.

2. How do you write an open invoice?

To write an open invoice, include essential details such as:

• Invoice number and date

• Buyer and seller details

• Description of goods or services provided

• Total amount due, including taxes (GST, if applicable)

• Payment terms and due date

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 recorded in the system. It remains open until the payment is processed and posted against the invoice in the accounts receivable module.

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

An open invoice is any invoice that has been issued but not yet paid, regardless of its due date. An overdue invoice is an open invoice that has passed its due date without payment.

5. How can I track my open invoices?

You can track open invoices using:

• Billing and invoicing software that automates reminders and payment tracking

• Enterprise resource planning (ERP) systems for real-time financial monitoring

• Spreadsheets or manual records, though automation is more efficient

6. Is an open invoice the same as an outstanding invoice?

Yes, an open invoice and an outstanding invoice mean the same thing. Both terms refer to an invoice that has been issued but is still awaiting payment.