What is an Open Invoice? How does it work?
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How many invoices are there in the market?
According to an estimate, there were over 550 Billion invoices in 2019 which is estimated to become at least 4x by 2035!
And you cannot escape it!
Timely invoicing is an essential part of business, especially when the business is small or you are a freelancer whose cash flow is limited and depends upon timely payments.
The idea of invoicing is to generate a receipt for the products or services you provided to your customers so that they can pay you back later. However, what makes it difficult is the time period between generating an invoice and waiting for the payment.
Here, the term open invoices come into play. Go through the article to have an in-depth analysis of open invoices. What are they? How does Open Invoice work?
What is an Open Invoice?
Though open invoices play an integral part in the continuity of cash for any business, they are not hard to understand.
Open invoices are invoice documents that vendors or suppliers issue to their customers for the product or service they have provided but they are not yet paid.
When your business provides a product or service to customers, you issue them a payment invoice that shows the amount is due and the details related to the service provided. This invoice gives all the details regarding the due date for the payment and the preferred payment method.
This is the point in the payment process where the invoice is said to be open because it has been sent to the client, but has not yet been paid. An open invoice demonstrates the client’s commitment to pay you for your services.
Read more: How to process an invoice?
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Let's understand open invoices in a little detail.
Fortunately, understanding open invoices are not difficult at all. They are a common part of the accounting cycle for businesses that do credit-based transactions.
While this may sound concerning to the vendor whose payments are due, open invoices act as proof for both the client and the vendor that a certain payment is due, and they have to pay it in a limited timeframe.
An invoice looks like the following image.
There is no hard and fast rule when it comes to generating open invoices. Typically, an open invoice consists of the following information:
- Unique invoice number and PO number
- Company’s and customer’s name and address
- Details of goods or services provided
- Date of supply and invoice created
- Cost of each item and total amount due
- Due date and payment method
All invoices are said to be open because they are not yet paid. While making invoices, it is crucial to add all the details correctly to match the client’s purchase details. If they aren’t entered correctly, payments might get delayed.
Some companies send open invoices to the client along with bank details to make the payment, while others may send a link to redirect you to different payment method options.
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How Does an Open Invoice Work?
Technically, the working of an open invoice is not complicated as it might seem. Once the client has purchased goods or services from your business, the payable department of your business will send an open invoice to the customer who owes you money.
Now that the customer has received the open invoice, its accounting department will ensure that the invoice is legitimate and accurate using an invoice-matching process.
If the open invoice shows any difference, the customer’s accounting department sends it back to the vendor for review. However, if there is no inconsistency in the open invoice, it must be paid in the timeframe provided by the vendor.
In case the invoice is not paid in the agreed timeframe, the vendor may or may not charge an additional fee to the customer as a penalty for the late payment.
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What is the invoice-matching process?
The invoice matching process is a process in which the finance department of the customer matches the details on the open invoice with the original details of the customer’s purchase.
Sometimes, organizations deal with thousands of vendors at the same time. So, they receive many invoices on a daily basis. In order to ensure that the vendors are not overcharging the business, or to reduce duplicate invoices and vendor fraud, invoice matching is used.
Whenever a company wants to buy anything, they send across a purchase order. The purchase order lists down all the details and requirements of the buyer to the seller. During the course of the engagement, buyers will receive the requested goods or services. As proof, they'll get receipts like orders or packing slips. Finally, when all the goods or services are delivered, the seller will send an open invoice for the buyer asking for the full payment. In order to ensure that there are no mistakes, businesses should match all the documents to validate if all requests are complete and the value of all the goods and services requested.
Open Invoice Example
Let's understand open invoices using an example:
Suppose you own an office and you order office furniture: 50 chairs and 25 tables and your budget is $2000.
You send your vendor a request for 50 chairs and 25 tables along with your budget - This is your purchase order.
The vendor agrees you have a discussion about the pricing and the way of sending the goods. You'll receive shipment in 2 parts. Every time you receive a shipment, the delivery personnel will ask you to sign a receipt and hand over the confirmation of delivery. - These are your delivery slips.
Finally, once you've received all your furniture, you'll inspect for any damaged goods. Make sure your return and get new ones delivered. Finally, you'll get an invoice from the vendor asking you to pay for the furniture. That is the invoice.
Before paying, you'll of course match all three documents. This is an invoice matching process.
In our example, it was easy to match invoices because they were fewer in number. As the business grows, so do the invoices. Therefore, businesses need to automate invoice processing.
The automated invoice matching process ensures that there are no inconsistencies between the purchase order (PO) and the open invoice. It includes matching pieces of information like:
- Supplier name
- Vendor code
- Purchase order
- Purchase amount
An In-depth Guide to 3-Way Match
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What are the different types of Open Invoices?
There is a range of different types of open invoices. Some may be common, while others may need to be handled more closely than others. Some common types of open invoices are:
Online pending payments
Online payments are generally generated through a payment processor. If the payment is not done by the buyer’s bank account, it goes into the pending online payments category and gets confirmed once it is paid by the customer.
These invoices are generated through invoice automation and require no need for manual invoice generation. We will discuss invoice automation and its benefits later in the article.
Manual, offline pending payments
As the name suggests, manual offline pending payments could be cash, checks, or bank transfers stuck in the pending phase.
Unlike online payments, offline payments require you to manually update the payment status of the transactions made by the customer.
Read more: Manual Data Entry
Bills are open invoices that have gone past the due date. A payment processor will automatically mark the payment as “retired” after the due date. Bill sits in the system as an open invoice until it is paid by the customer.
Also, late payments show how customers handle payments, and they might have issues with sending payments. The vendor may charge extra as a penalty to the customer.
Read more: Extracting data from bill of lading
Also known as incomplete payments, failed payments are payments that occur due to the customer’s responsibility.
Failed payments can occur due to several different reasons, including incorrect bank details of the customer, or lack of enough funds in the customer’s account.
Discounts and Fees
Though many vendors might charge a penalty fee due to late payment, some also offer discounts to their loyal customers for timely payments and their cooperation.
Penalties due to late payment typically range between $20-$55, and some vendors may also provide a grace period for their customers to make the payments. Creditors are advised not to charge 10% interest per year as a penalty for late payments.
Early discounts before receiving the payment can help motivate the customer to make the payments as early as possible. Vendors having cash flow issues can benefit from on-time payments by providing catchy offers and discounts to the customer.
Read more: Payment Reconciliation
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What are the challenges of using open invoices?
Open invoices are a given at any point in time for a business, because, everyone wants one.
Let's take a look at the challenges of having open invoices in detail.
Too Many Open Invoices
One of the biggest challenges of open invoices is having too many open invoices at the same time. It means your business consists of so many invoices that are not being paid yet. Having too many open invoices can create cash flow issues and bottlenecks for your business.
Moreover, you become unable to pay your own payments, thus resulting in to cessation of business processes. Though this issue can be resolved by turning to invoice discounting services, it may not prove to be as effective in the long run.
The third party is held accountable to handle the open invoices. They require a percentage of the profit made to make you get rid of the bad debt. This is not a beneficial and long-term solution as it eats up a certain percentage of your profit margins.
High Processing Time
Invoice processing is mostly paper-based.
80% of business documents are paper-based. Paper records double every 3 years.
Manual data entry and verification processes while using paper-based documents led to a high turnaround time. It also leads to a high error rate if done manually. Due to all of these reasons, the Accounts Payable department takes more time to clear these invoices.
Manual Errors in Invoices
If the invoice matching is done automatically, even a single typo or an error in the name will not return the results. It is important to ensure that there are no typos, line errors, or major differences in different documents that need to be matched. That is often not the case.
61% of late payments are due to incorrect invoices.
Manual errors in open invoices are one of the biggest challenges faced by the accounts payable department.
Late Invoice Payments
More than 60% of invoices are paid late!
That is a lot of late payments. But due to multiple reasons mentioned above including lost documents, unable to match, typos, unsatisfied customers and more, if your invoice passes the due date, you might have to pay an extra charge. It varies from vendor to vendor. But, it is of course an extra charge for your organization.
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The journey from Open to Closed Invoice
An open invoice is said to be a closed invoice once the client has made the payment to the vendor. Both parties will record the completed transaction, making it a closed invoice.
For the customer, the payment is recorded as a credit to the accounts payable account. Also, the details of the payment made generally consist of the invoice numbers and the vendors’ information.
Furthermore, this allows businesses to be prepared for audits and record everything if there is a problem in the payment processes.
On the vendor’s end, the closed invoice is recorded as a memo of payments made by the customers.
Both parties now have a clear record of the payments made. Now the open invoice is transitioned to a closed invoice and will remain as a record in the system for both the vendor and the customer.
What happens when an open invoice is paid?
As mentioned above, once you have received payment for the open invoice, you can then close the invoice. When the invoice was not paid, it was said to be an open invoice. Now that the payment has been made and the vendor has received it, the open invoice is converted into a closed invoice.
How does open invoice software work?
Invoicing software is a tool for invoice automation. It generates and sends an open invoice to the customers for the rendered services and products. This tool automatically creates invoices that include details of products and services along with the cost details and sends them to the buyer.
Simply said, invoice software is designed for accuracy and automation. If you have a business that needs to send out invoices regularly, invoice automation can help you handle repetitive tasks while ensuring it is done accurately and effectively.
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What are the features of invoicing software?
Invoicing software has several different features to do open invoice automation. While selecting an automated invoice processing software, it is always beneficial to match requirements with the features.
We've prepared a list of some must-haves for invoice automation software.
Automatic Document Upload
The invoice automation software should automatically source the documents from multiple sources. Instead of manually uploading documents, automatic document upload can save time and effort.
The invoice automation software like Nanonets can help you source documents from multiple sources like Gmail, drive, desktop, outlook and more.
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Creating Open Invoices Automatically
It allows you to create clean and professional open invoices. You can also customize these invoices to match your brand.
Updating Customer Records
Record creation is an essential part when generating open invoices. Invoicing tools enable you to make records related to customers’ purchases and payments. You can store these records in an equipped database.
Built-in, predefined templates
Many tools have built-in templates to make it easy for you to make open invoices. You just have to select your desired template and enter the fields.
Multiple currency settings
Multiple currency settings aid in managing receipts, accepting payments, and managing taxes. It benefits businesses with global operations. Nanonets can automatically detect currency and update the 3 letter code without any external supervision.
You can send and receive information immediately due to the availability of a readily centralized database. Nanonets create a complete database of all open invoices. Nanonets extract all the information extracted from invoices like date, vendor name, amount, taxable income or more. It stores the data into a centralized database so that everyone can use it to perform any analytics.
With Nanonets API integration, you can connect extracted invoice data to any data source of your choice!
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Good invoicing software minimizes the need for using external systems for tax reporting. You can make invoices, payments, and tax reports within the system.
A detailed expense report can help organizations keep tabs on their expenses, reimbursements, collections and more. Expense reports play a critical role in keeping a close eye on relevant metrics.
Open invoices are nothing but expenses for the organization. There are different vendors who generate different invoices. In order to keep a tab on invoices, the account payable department must categorize the business spending into multiple categories.
An invoice processing software should allow you to tag expenses on the go for better accountability and visibility of expenses. Nanonets allow for the instant categorization of expenses.
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Vendors send you invoices and then they follow up multiple times. This might become a little frustrating. A smart invoice processing system will automatically send notifications to all vendors regarding the status of the payment. This helps all the stakeholders stay updated about the payment status and keeps your inbox free.
Automated Invoice Processing
You have 100 vendors. Do you need 100 different AI models to extract information? No!
With intelligent, pre-trained AI models like the invoice OCR model on Nanonets, you don't have to create a new model for every format. Your invoice automation software should be able to extract information from any format or any designed invoice without hassle.
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What does invoicing software do?
An invoicing software enables you to do the following key processes.
Create and customize invoices
The invoice software allows you to create and customize open invoices. Unlike traditional invoicing, automated invoicing enables you to use built-in templates to generate an invoice.
Facilitate billing and payment
Invoicing tools have the capability to conveniently process billing and payments. It enables you to make an online portal where customers can directly make payments and you can process them as soon as they are received.
Also, invoicing software supports multiple languages and currencies which enables you to accept foreign currencies.
Invoicing tools facilitate you with generating reports and helps you track and monitor reports of open invoices.
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What are the benefits of open invoice automation?
Minimize missed or late payments
Having the right software solution can help you minimize missed or late payments by keeping a track of all the invoices. It accurately and actively monitors your billing commitments so that the payments are never missed.
Maintain a professional image
A good and professional billing solution can help you improve your reputation. Most invoicing software also allows you to customize your logos and improve other designs for payment documents and open invoices. It will allow you to have a professional approach among other vendors and your customer.
Minimize fraud and improve security
Invoicing software also have security features to ensure secure billing to payment processes and protect you from frauds and hacks. This is a more secure way of making invoices than the manual process.
Create invoices faster and accurately
Unlike manual invoice generation, invoice automation enables you to create invoices faster and accurately where you only have to enter the variable elements.
Generate invoices anywhere
Most online invoicing software is connected through cloud computing and web-based technology that allows you to generate invoices from any location with internet connectivity.
Keep vendors and suppliers happy
It is essential to make good relations with the vendors, suppliers, and other contractors as a good sense of business relationships. Invoice automation enables you to process invoices faster, resulting in fast payments, thus improving the overall relationship between vendors and clients.
Accurate cash flow
With invoice automation, you can see accurate numbers of cash flow. It enables you to see where your money is, how much money is stored in the accounts and how much is left. There is no need to have manual documentation of the cash flow.
When there will be invoicing software for generating open invoices, this will definitely lessen the burden on the employees that is due to manual and traditional invoice generation. No need to spend hours generating and matching details on open invoices. This will enable employees to spend time on something else and enhance productivity.
Open invoices are helpful in business terms as they allow us to have a record of payable amounts. Familiarizing yourself with open invoices will help you quickly scan your accounts payable processes. You now know what open invoices are, how they work, and what role invoicing software play in generating open invoices.
It is time you invest in invoicing software to generate error-free open invoices without any hassle. Take the advantage of accounts payable automation.
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