Outstanding invoices negatively impact business operations by affecting cash flow, even causing lowered credit or lack of funds. When you don’t have funds to pay employees or satisfy other business expenses, you might damage your reputation and incur fees on expenses you owe. To avoid these unfavorable circumstances, every business — large or small — must have a plan for collecting outstanding or overdue invoices.

Overdue vs. Outstanding Invoices

An outstanding invoice is still within its due date, but it hasn’t yet been paid. An unpaid invoice has passed the due date without payment. Most businesses set invoice payment terms like a net 30, meaning the invoice must be paid in 30 business days. For 30 days, the invoice is outstanding. After 30 days, the invoice becomes overdue.

Overdue invoices have a higher negative effect because they leave your business short of the money you need. Too many unpaid invoices may lead to difficulty paying your business expenses like payroll or rent. Overdue invoices also impact cash flow and can lower your chances of qualifying for financing.

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How to Collect Outstanding or Overdue Invoices

Given the challenges that overdue invoices can bring to a business’s operations, companies should do everything possible to ensure prompt payment. Businesses often use several methods to track invoices and collect payments.

1. Identify Outstanding Invoices

Collecting money owed begins with developing a strategy to track invoices. Most accounting software allows businesses to record when invoices are sent and when they become overdue. Some software programs can even send automated payment reminders to encourage clients to pay on time.

If your accounting software lacks these features, you should develop another tracking method. Record the day you send each invoice in your calendar. Then, set a reminder to follow up when the invoice becomes overdue. When you have a reliable tracking method, you can avoid worrying about unpaid invoices until they are close to due or overdue. When an invoice becomes overdue, it’s time to move to other collection methods.

2. Send Invoice Reminders to Customers

Sometimes customers might miss an invoice. Maybe they’re out of town doing business or an invoice gets lost in their inbox. If an invoice is close to due, you can start with a friendly follow-up email reminding customers of the invoice. Many times, this gentle reminder is enough to encourage customers to pay. If they have yet to receive the invoice, they have time to pay before it becomes overdue.

If the payment date passes without customer communication, you might follow with a stricter email. You can start with an overdue notice informing clients that time has run out to pay the invoice. If they still refuse, more stringent measures may become necessary.

3. Consider a Late Payment Fee

Businesses that face late invoices can institute fees for overdue payments. Establishing penalty fees can encourage customers to pay on time because they will incur higher costs without doing so. Any fees collected can also help a business save extra cash, creating an emergency fund to cover expenses if future invoices are late. If your company currently lacks a late payment fee structure, inform customers of the new policy, then institute it on the next invoice.

Some companies also offer incentives for early payment. For example, a client might receive 1%-2% off their payment price if they pay within 10 days of receiving an invoice. This cash benefit encourages businesses to pay earlier, reducing the chance of future overdue invoices.

4. Reach out Over the Phone

Sometimes, a more personal approach can help a business receive unpaid invoices. If your company has previously sent emails, try a phone call. This approach can remind customers that the situation is serious. A personal conversation might also reveal why a customer still needs to pay. A customer might confess to a lack of funds. In this situation, you can potentially work together to develop an alternate payment plan that works for both sides.

5. Allow Partial Payment Options

If your client has cash flow problems and cannot pay an invoice, repeated emails won’t yield results. Instead, you might institute a three- to six-month payment plan, allowing clients to repay the money slowly. While you will not receive full payment immediately, you may receive enough to pay your outstanding expenses.

A payment plan only works in some cases. For example, you may never receive the full payment if a client goes bankrupt before providing the total payment amount. In each case, you can weigh the pros and cons before offering a payment plan.

How to Plan for Outstanding Invoices

How to Plan for Outstanding Invoices

Most businesses face outstanding or overdue invoices at some point, so creating a plan for how to deal with an outstanding invoice can help your operations run more smoothly. If you have tried several of the above methods and found that they work well, create a step-by-step plan using those strategies.

Step one might be tracking all invoices. When they are close to the due date, send a friendly reminder email. Then, try a phone call. After a long period without payment, instituting a payment plan or late payment fees may be your next s