What is an Unpaid Invoice?

Unpaid Invoice Definition

An unpaid invoice is a bill you've issued to a client for products or services you've provided, but it hasn't been paid yet. When you run your business, after delivering a product or service, you typically send an invoice to your client detailing the work done, the total cost, and the payment due date. 

If the client does not pay the invoice by the due date, it becomes unpaid. This situation can affect your business's cash flow, as it represents money owed to you that you haven't received. Managing unpaid invoices is crucial for maintaining the financial health of your business. 

It can require following up with the client, sending reminders, or even taking legal action to ensure you receive the payment owed to you.

Collecting an Unpaid Invoice

Handling an unpaid invoice requires patience, persistence, and a clear strategy. Here’s how you can approach this situation:

• Review the Invoice and Payment Terms: First, ensure that the invoice you sent is accurate and that the payment terms are clearly stated. This includes the total amount due, the due date, and any late payment interest. Mistakes can happen, and you want to ensure the oversight isn't on your end.
• Payment Reminder: If the payment is past due, send a polite reminder to your client through dunning strategies or an overdue invoice letter. Sometimes, emails get lost, or other priorities come up. A gentle nudge can often prompt a quick payment for the past due invoice.
• Follow Up with a Phone Call: If you don’t receive a response to your late invoice payment reminder, follow up with a phone call. This adds a personal touch and can help you understand any reasons behind the delay. During the call, agree on a new, realistic invoice payment date if necessary.
• Offer Payment Options: If your client is experiencing financial difficulties, consider offering flexible payment options. This could include a payment plan that allows them to pay the invoice in smaller, more manageable amounts.
• Send a Formal Demand Letter: If attempts to contact the client and negotiate payment fail, you may need to send a formal demand letter. This letter should be more formal than your previous communications, stating the unpaid amount, previous attempts to collect the payment, and a final deadline for the overdue payment. Mention any legal action you will take if the payment isn't made by the deadline.
• Consider a Debt Collection Agency: As a last resort, you might hire a collection agency to recover the debt. Collection agencies specialize in collecting unpaid debts but will take a percentage of the collected amount as their fee.
• Explore Legal Proceedings: Legal action can be necessary if the outstanding invoice amount is significant and other efforts, such as imposing a late fee. Consult with an attorney to understand your options and the likelihood of recovering the debt legally.

Impact of Unpaid Invoices

When you have lots of unpaid invoices, it impacts your business in several significant ways:

• Cash Flow Disruption: The most immediate effect of an unpaid invoice is on your accounts receivable and cash flow. You rely on incoming payments to cover your expenses, such as paying your employees, buying supplies, and running your operations. When a client doesn't pay on time, it can disrupt your financial planning and analysis, increase bad debt risk, and even prevent you from meeting your financial obligations.
• Time and Resources: Chasing down unpaid invoices takes time and resources away from your business. Instead of focusing on growth activities or serving other clients, you and your team might spend hours sending reminders, making phone calls, and possibly dealing with legal processes to recover the debt. Following up on an outstanding payment is time and energy not spent on productive work.
• Increased Costs: Trying to collect on an unpaid invoice can lead to additional costs. If you hire a collection agency or pursue legal action, these services come with fees. Even without these measures, the administrative costs of sending reminders and managing communications add up, affecting your bottom line.
• Relationship Strain: An open invoice can strain or even sever your relationship with a client. While some clients may have genuine reasons for delayed payment, following up and demanding timely payment can lead to tension and conflict. This can harm your business reputation and potentially lead to the loss of future work.
• Financial Planning Challenges: Unpaid invoices make financial forecasting difficult. When you can't predict your cash flow accurately, making informed decisions about investments, expansions, or other opportunities that might require upfront capital is hard.
• Emotional Stress: Beyond the tangible impacts, dealing with unpaid invoices can be stressful. Worrying about when or if you'll get paid adds emotional strain, affecting your decision-making, productivity, and overall well-being.

Proactively Preventing Unpaid Invoices with Accounts Receivable Software

Here's how you can leverage your AR software to minimize the risk of unpaid invoices:

• Payment Reminder: Use your accounts receivable software to set up automatic dunning reminders. These reminders should notify them of upcoming due dates before the invoice is due and follow up immediately after a payment is late. Tailor these reminders to be polite and professional, reinforcing the importance of timely payments.
• Monitor Client Accounts Regularly: Keep a close eye on your clients' payment patterns of your clients through your AR software. Identify trends or red flags, such as consistently late or partial payments, which could indicate a potential risk for unpaid invoices. This early detection allows you to address issues before they escalate.
• Establish Clear Payment Terms: Clearly define your net terms and ensure they are communicated to your clients at the beginning of your relationship. Use your AR software to document and include these terms in every payment communication. This clarity helps set expectations and reduces misunderstandings.
• Payment Method: You can still offer multiple payment options to every client. Encourage them to use the most convenient method, making it easier to pay on time. List these options in your invoice and reminders.
• Implement Credit Checks: Before taking on new clients, conduct credit checks with a credit score to assess their creditworthiness. This step helps you identify clients with a higher risk of unpaid invoices. Use the information gathered through your AR software to make informed decisions about extending credit.
• Communicate Proactively: Build strong relationships with your clients through regular communication. Use your AR software to keep track of interactions, and don’t hesitate to reach out if you notice a pattern of late payments. Sometimes, a simple conversation can resolve underlying issues leading to delayed payments.
• Enforce Late Payment Penalties: Make it clear that there are consequences for late payments, such as a late fee or interest charge. Use your AR software to track these penalties and communicate them to your clients as part of your payment terms.