Keeping your business well-funded is critical for its ongoing survival. Unfortunately, the longer money owed to you exists in a potential state, as an outstanding invoice, rather than as actual cash, the less flexibility you’ll have to operate and grow as an organization. And if too many invoices end up in this unpaid status, your business could face some real problems.
In fact, according to data mined by Forbes from the U.S. Bureau of Labor Statistics and the U.S. Small Business Administration (SBA), 38% of new small businesses — meaning those founded in the past year — fail due to insufficient cash reserves. This is particularly troubling, as Xero found in its own research on small business transactions in Q3 2023 that these same organizations, on average, typically received payments from their customers 8.2 days after the due date.
In this article, we’ll look into the causes for these late invoices as well as how you can chase outstanding invoices in a manner that gets them paid more quickly.
What is an outstanding invoice?
An outstanding invoice — also referred to as an open invoice or an unpaid invoice — specifically denotes any payment request that has been created and sent to a customer but has not yet been paid. Some camps, however, narrow this definition further, and only apply the term to those invoices that are unpaid and that have not yet passed their due date. For this article, we’ll use the former definition.
Outstanding invoices vs. overdue invoices
Extending the definitional confusion, the terms “outstanding invoice” and “overdue invoice” are often used interchangeably. However, these phrases have very different meanings. While “outstanding” typically refers to all unpaid invoices, a payment request is only considered “overdue” when the set due date has passed without payment being made.
Why do outstanding invoices occur?
As such, unless your buyers pay their invoice at the same time you issue it, most of your invoices will be categorized as outstanding for at least some period. Ideally, they will be out of that status soon, but they may linger due to:
- Extended due dates: If you offer generous payment terms that extend due dates by 60 or 90 days, don’t be surprised when your customers take advantage of that flexibility.
- Accounts payable (A/P): Slow, inefficient payment workflows can delay when you receive your money, particularly if the buyer has overly complicated internal approval processes.
- Money troubles: Issues with cash flow can leave some purchasers with insufficient capital to cover all of their expenses on time.
- Human error: Businesses are composed of people, and sometimes those people make mistakes, like forgetting to send out a payment or making a short payment.
- Disputes: If you have concerns about the delivered goods or service, or if the invoice you sent contains errors, you likely won’t receive payment until the issue has been addressed.
10 strategies for chasing outstanding invoices
Whatever the reason for these unpaid invoices, you should secure payment as quickly as possible. While these owed amounts might be listed as revenue on your balance sheet, you can’t functionally do all that much with this income until it hits your bank account.
1. Use automation to facilitate dunning
A formalized dunning process can help to quickly convert your outstanding invoices into cold hard cash by creating a set routine that frequently reminds customers of their monetary obligation. But you’re relying on manual processes to create and send your reminders. In that case, human forgetfulness, unintentional errors, and office absences will undermine the consistency of these efforts.
When you automate this routine, however, you can overcome the human element, keeping these owed amounts at the forefront of your customers’ minds. For our own Accounts Receivable Automation platform, we’ve included a Smart Chasing feature that lets you build your outreach cadences based on the frequency that works best for your business. This allows you to coordinate at the account level, the invoice level, or both.
Keep reading: Discover more use cases for automated dunning and collections at Invoiced.
2. Time your dunning messages to arrive at sensible intervals
The best frequency for chasing receivables will vary depending on the nature of your business, your industry, and your customer base. So, you’ll likely want to experiment to find the approach that works best.
Typically, dunning messages should begin shortly after the initial invoice is sent, with no more than a single notice being delivered in a given week. It’s also wise to have one iteration arrive within 3-5 business days of the actual due date. Of course, if payment is not received on time, you’ll want to ensure that these messages continue, preferably on a regular cadence – again, this can be facilitated with automation.
3. Use the appropriate tone in your dunning notices
The wording of your dunning notices should strike a balance between professionalism, empathy, and firmness. The notices should make it clear that payment is expected without being overly aggressive or insulting — there’s no need to undermine a long-term business relationship due to one misstep. At the same time, you likely will want the tone of these to become more assertive as the due date approaches (or passes).
Consider creating standard templates for each of these notices. The consistency will help reduce stress and confusion for your accounts receivable (A/R) staff, while ensuring that the proper message is delivered at each stage in the invoice-to-cash (I2C) cycle.
Keep reading: Not sure what to write? Check out our blog: How to Write a Past Due Invoice Email: Templates + Examples or view our custom PDF templates.
4. Keep in touch with your customers outside of payment conversations
It’s incredible how many issues can be resolved in a single conversation, so it rarely hurts to pick up the phone and chat with your customers about any payment challenges or concerns. Often, if a simple question or misunderstanding is the only thing holding up the process, it can be diffused with just a few words. However, you don’t want the first time you speak with one of your patrons to be just to demand payment. Instead, whenever possible, try to create open lines of communication with them ahead of time and build an actual relationship.
5. Use a multi-channel communication strategy
Phone calls can be missed. Spam filters can eat emails. Letters can fall behind filing cabinets. Don’t assume that your chosen communication method is the best choice for every customer, every time. Instead, opt for a multi-channel strategy that reaches more than one person at the buyer’s organization.
For instance, the Invoiced Smart Chasing feature uses simultaneous touches across phone, email, text, and more to keep customers informed of upcoming payment due dates.
6. Leverage incentives and discounts
You can encourage prompt payment for your outstanding invoices by providing additional reasons for your customers to act quickly. Consider offering an early payment discount or similar credit terms. This approach is particularly useful if your business is short on cash and wants to motivate buyers to act long before the invoice due date. Please note, however, that if you leave these incentives in place permanently, you run the risk of them eating into your overall profit margin.
7. If the carrot doesn’t work, use a stick
Conversely, you might also put in place negative consequences for those outstanding invoices that remain unpaid after their due date. Typically, this will take the form of late fees or interest charges; however, you might also place limits on how much a delinquent account can order, or if they can make new credit-based purchases at all.
Keep reading: Discover more use cases for late fee automation at Invoiced.
8. Accept installments
If a buyer can’t pay the full amount upfront, consider giving them the option to make payments over time. You could offer installment plans that spread out the total cost of a shipment or service over time, especially for larger orders.
Depending on your business model, subscription billing might also be a good option to explore.
9. Look at the numbers
Whatever strategies you do employ, there will always be room for improvement. Leverage comprehensive reporting and real-time data streams to keep track of your overall invoicing and dunning efforts, looking out for any process bottlenecks, payment irregularities, or general trends.
Similarly, each time you make a change to your operations, monitor the output to determine if the new approach is helping, hurting, or having no effect. Some common metrics you should keep track of are your:
- Accounts receivable turnover (ART)
- Average days delinquent (ADD)
- Bad debt to sales ratio
- Collections efficiency index (CEI)
- Collection costs
- Day sales outstanding (DSO)
Keep reading: Discover CFO KPIs and Metrics for Success
10. If all else fails, bring in outside support
Sometimes, you won’t have all of the in-house resources you need, particularly if you are dealing with several uncooperative buyers. Don’t be afraid to work with third-party organizations to help accelerate your I2C efforts.
For instance, you might consider invoice factoring, where you sell your outstanding invoices to a factoring company that oversees the collection of the owed funds for a processing fee. This approach typically makes sense if you’re experiencing a period of negative cash flow and have a pile of outstanding invoices.
Alternatively, if you’re at risk of writing off some of these bills as bad debt, consider reaching out to a collection company or taking legal action.
How to prevent outstanding invoices before they happen
There are several proactive measures you can take to limit the lifespan of your outstanding invoices, preventing problems before they arise. A/R automation offers one of the most timely and cost-effective strategies.
Customers are increasingly more likely to pay off an invoice fully and quickly when the payment request is received soon after the good or service was delivered. And with automated workflows, like those we provide with our Accounts Receivable Automation platform, you can eliminate much of the delay and wait periods common to a more manual approach.
Similarly, most automation software helps eliminate transcription and other human errors by seamlessly moving data between your various back-office systems. For instance, we designed our solution to offer broad integration support for the most common enterprise resource planning (ERP) platforms.
Invoiced can also help you:
- Clarify payment terms: Keep these conditions simple and ensure that buyers are familiar with when, where, and how much they will need to pay before making a purchase.
- Make it easy to pay you: It should never be a headache to give you money. That’s why we include a self-serve customer portal in our solution that empowers buyers to initiate transactions, manage payment data, and set up AutoPay on their own.
- Be available: One of the most common reasons for a payment delay is an outstanding dispute over the given invoice. Offer communication channels to buyers that allow them to notify you of these complaints well before the due date.
Keep reading: Discover how to build a custom A/R workflow with Invoiced’s Automation Builder.
Automate invoice chasing with Invoiced’s Smart Chasing feature
When it comes to ensuring that your business is paid promptly and consistently, you’ll be hard-pressed to find more valuable support than the Smart Chasing function of our Accounts Receivable Automation platform. With one simple tool, you can keep the lines of communication open between your business and your customers from the initial drafting of an invoice until its close, all while requiring little to no effort from your staff.
We offer pre-built messaging templates and allow you to reach out through multiple channels, ensuring that your payment requests are heard, understood, and stay at the forefront of your customers’ minds. At the same time, our solution also delivers comprehensive reporting, AI-powered cash matching, and even global payment support for 140 currencies thanks to Flywire software.
If you need more convincing on why and how to collect on unpaid invoices with our software, schedule a demo today.
