When a business purchases a product or service from a vendor or supplier, it usually receives an invoice. Invoices are documents used by the seller to request payment for goods and services sold to the customer. Bill is considered an umbrella term that encompasses numerous types of bills. For example, if you have a pending payment in your ledger, it is considered an open invoice. An open invoice is closed after it has been paid by a customer and moved to the revenue section.
So what exactly is an open invoice?
What is Open Invoice?
An open invoice is an invoice that a vendor or supplier has issued for a product or service they have provided to their customers, but has not yet been paid.
Before issuing an open invoice, the business provides a product or service to its customer. Issues a payment invoice to customers showing the amount due and details about the service provided. This invoice contains all the details regarding the payment due date and preferred payment method.
As a result, the invoice is open as it has been sent to the customer but has not yet been paid. An open invoice shows the customer’s commitment to pay you for your services.
How Does Open Invoice Work?
Technically, the operation of an open invoice is not as complicated as it seems. When a customer purchases goods or services from your business, your business’ accounting department sends a clear invoice to the customer who owes you money.
When the customer receives the open invoice, the accounting department uses an invoice matching process to ensure that the invoice is legitimate and correct.
If the open invoice differs in any way, the customer’s accounting department sends the invoice back to the vendor for review. However, if there is no discrepancy in the open invoice, the invoice must be paid within the time frame provided by the seller.
If the invoice is not paid within the agreed time, the seller may charge the customer an additional fee as a penalty for late payment.
Open Invoice Matching Process
Sometimes businesses deal with thousands of sellers at once. Therefore, it receives many bills on a daily basis. Invoice matching is used to ensure that vendors do not overcharge the business or to reduce duplicate invoices and vendor fraud.
The open invoice matching process is a process where the client’s finance department matches the details on the open invoice with the original details of the client’s purchase.
Whenever a company wants to buy something, it sends a purchase order. The purchase order lists all the details and requirements of the buyer to the seller. During the commitment period, buyers receive the goods or services requested. Receipts such as orders or packing slips are taken as proof. Finally, when all goods or services are delivered, the seller sends an open invoice requesting full payment for the buyer. To avoid errors, businesses must match all documents to verify the completeness of all claims and the value of all goods and services requested.
How to Make Open Invoice?
To issue open invoices, a business can follow these steps:
1. Set the terms of sale
Before issuing an open invoice, the business must determine the terms of sale, including the time of payment and any other applicable terms.
2. Prepare the invoice
The business must then prepare the open invoice, which should include the following information:
- Business name and contact information
- Customer’s name and contact information
- an invoice number
- Description of goods or services purchased
- Total amount due
- due date
- Applicable terms and conditions
3. Issue the invoice
After the invoice is prepared, the business can issue the invoice to the customer electronically or manually.
4. Follow up
The business must follow up with the customer to ensure that the invoice is paid on time. If the customer is unable to pay the invoice by the due date, the business may need to negotiate a revised payment schedule or take other action to collect the debt.
Where is the stamp printed on the open invoice?
The open invoice stamp is printed on the invoice issued to the customer. The stamp is usually placed at the top of the invoice, above the customer’s billing information and sales details.
The open invoice stamp serves as a visual indication that the invoice is an open invoice, meaning that the customer has not yet paid for the goods or services purchased. The stamp may contain an identifier such as a serial number or invoice number, along with the words “Open Invoice”, “Unpaid” or similar.
In addition to the clear invoice stamp, the invoice may contain other information such as terms of sale, due date, and business contact information. It is important for businesses to carefully review the information on their invoices to ensure it is accurate and complete.
What is the Open Bill Payment Term?
The open invoice payment period is usually specified on the business invoice to the customer and may vary depending on the terms of the sale and the customer’s specific needs.
The open bill payment period is usually 30 days, but can be shorter or longer depending on circumstances. Some businesses offer shorter payment terms, such as 15 or 20 days, while others allow their customers to pay for longer periods, such as 60 or 90 days.
It is important for businesses to carefully consider the open bill payment period they offer their customers. A longer payment period helps build relationships and trust with the customer, but can also pose some risks to the business as it increases the likelihood that the customer will not pay.
Open Invoice Example
Let’s say you have an office and you ordered office furniture. Your budget for 50 chairs and 25 tables is 2000 Rs.
When you send the seller a request for 50 chairs and 25 tables with your budget, it becomes your purchase order.
The seller has a conversation with the buyer about pricing and the way to ship the goods. For example, he may say that he will ship the products in 2 pieces and each time you receive the products, he may ask you to sign a receipt and confirm the delivery through the delivery staff. These are your delivery receipts.
After receiving all your furniture, you should also check for any damaged products. If there is damage, you must return it and receive the new items.
Finally, you receive an invoice from the seller asking you to pay for the furniture.
At this point you need to match the documents before paying. This is an invoice matching process.
In our example, it’s easy to match bills as they are few in number. But as the business grows, so do the bills. At this point, businesses need to automate invoicing.
The automatic invoice matching process ensures that there are no discrepancies between the purchase order (PO) and the open invoice.
It includes information such as:
- Provider name
- Vendor code
- Purchase order
- Purchase quantity etc.
What are the Challenges of Using Open Invoice?
The challenges of issuing open invoices are as follows:
1. Too many open invoices
One of the biggest challenges of open invoices is having too many open invoices at once. This means that your business has a large number of unpaid invoices. Having too many open invoices can create cash flow problems and bottlenecks for your business.
Moreover, if you cannot pay your own payments, this will cause business processes to stop.
2. Manual errors in invoices
61% of late payments are due to incorrect invoices. Manual errors in open invoices are one of the biggest challenges creditors face.
3. Late bill payments
You may incur additional charges if your invoice passes the due date due to lost documents, mismatches, typos, dissatisfied customers, and more. This varies from vendor to vendor. However, it can create an extra charge for your business.
Transition from Open Invoice to Closed Invoice
After the customer pays the vendor, an open invoice becomes a closed invoice. Both parties record the completed transaction, making it a closed invoice.
- Payment for the customer is credited to the payables account. Details of the outgoing payment usually consist of invoice numbers and business information.
- This allows businesses to be prepared for audits and record everything in case there is a problem with their payment process.
- The invoice closed by the vendor is recorded as a receipt of the payments made by the customers.
- Both parties now have a clear record of payments made. Now the open invoice becomes a closed invoice and remains as a record in the system for both the seller and the customer.
What Happens When Open Bill is Paid?
As we explained in detail above, you can close the invoice after receiving payment for the open invoice. The invoice is open when unpaid, but when the payment is made and the vendor receives the payment, the open invoice is converted to a closed invoice.
What are the Differences Between Open and Closed Invoice?
In an open invoice, the customer is obligated to pay the invoice at a later date, usually within a specified payment period.
A closed invoice is an invoice that has been fully paid by the customer. A closed invoice may be marked “paid” or “closed” and usually includes the date the payment was received.
There are a few key differences between open and closed invoices:
Payment status: An open invoice represents an outstanding debt, while a closed invoice represents a fully paid debt.
Payment period: An open invoice usually has a payment period for which the customer is responsible for paying the invoice. A closed invoice has no due date because the debt has already been paid.
Risk: An open invoice carries some risk to the business, as the customer is likely to default on payment. A closed invoice does not carry any risk as the debt has already been paid.
Invoice status: An open invoice is considered “active” because the customer still owes payment. A closed invoice is considered “inactive” because the debt has been paid in full.
By understanding the differences between open and closed invoices, businesses can better manage accounts receivable and minimize the risk of outstanding debt.
Should the Sales Invoice Be Open or Closed?
If the customer has not yet paid for the goods or services purchased, the sales invoice must be open. In an open invoice, the customer is obliged to pay the invoice at a later date, usually within a specified payment period.
If the customer has paid the price of the goods or services, the sales invoice should be closed. A closed invoice is an invoice fully paid by the customer. It can be marked as paid or closed and usually includes the date the payment was received.
At this point, it is important for businesses to follow the status of their invoices and to follow up on customers who do not pay their invoices on time. By carefully managing accounts receivable, businesses can minimize the risk of outstanding debt and improve cash flows.