What Causes Overdue Invoices?

Invoice due dates are there for a reason, right? So why do so many customers fail to pay invoices on time?

It happens all the time – estimates vary, but just about every business will have to deal with late paying customers at some point. Overdue invoices are more than just an inconvenience; they create negative cash flow and, at worst, can make it hard for business owners to pay their operating costs.

Understanding what causes overdue invoices helps to improve your processes to get customers paying on time.

TL; DR

Many customers just forget to pay invoices on time. Other common reasons for overdue invoices are disputes/queries, customer cash flow issues, technical glitches and internal payment cycles. Businesses can overcome these issues with a few careful techniques that encourage and incentivise prompt invoice payment.

Detecting unpaid invoices

Navigating late invoices is about maximising the number of invoices that are paid on time, and successfully chasing up late-paying clients quickly and effectively.

The process actually starts before an invoice becomes overdue. The content and design of invoices themselves can create issues, and it’s easy for customers to simply forget to pay them.

From a business perspective, detecting an unpaid invoice is a green light to start chasing it up. There’s no good excuse for a customer not to pay an invoice on time, and you’re well within your rights to start following up as soon as an invoice becomes overdue.

Outstanding invoices: a cause of arising tension between clients and customers

Unpaid invoices are both a signal of a poor customer relationship and a risk of damaging it even more.

At a basic level, invoices are about communication. It’s a business saying to a customer, “This is the work we did, this is what you owe us, and this is when it’s due.”

When an invoice isn’t paid on time, it can show that communication between business and customer isn’t as good as it could be. Businesses that don’t communicate well with customers in other areas of their dealings together are likely to have more overdue invoices to chase up.

The frustration of chasing overdue invoices can also harm the relationship further. It’s annoying to have to follow up with late paying clients, and if you let that show then it can leave a customer feeling defensive, or even embarrassed.

This can flow through to other parts of your working relationship, creating an impact that lasts long after the invoice is settled.

Why overdue receivables are a problem for businesses?

The frustration of chasing unpaid invoices isn’t the biggest issue when it comes to late-paying clients – although it might be the lasting memory in your mind.

The most serious impact of unpaid invoices on a business is on cash flow. When a business has healthy cash flow, it can cover all its outgoings (expenses, purchases, investments etc.) with the cash it has on hand. To do this sustainably and on a long-term basis, the business needs to be earning more money than it’s spending.

A business can operate while cash flow negative for a time, but it can only dip into its own bank account for so long. Cash flow issues are a leading reason for businesses failing – up to 82% of failed businesses cite cash flow issues – and this is the worst case scenario for unpaid invoices.

Overdue invoices create cash flow issues because, while they represent income, they’re not actually cash. An invoice is like a promise of having cash in the future, but you can’t use it until the customer actually pays.

Most invoices are payable within 30 days of being sent, and businesses need to be able to cover their outgoings in that time. If a customer doesn’t pay an invoice on time, the business has to dig even deeper into its own pockets to cover overheads.

Reasons for overdue invoices

So why are your customers not paying their invoices when they’re due? There are many possible explanations, but these are some of the most common:

Cash flow problems

Your customer may have cash flow issues of their own. Ironically, it may be that their customers aren’t paying their invoices on time, so they can’t cover their own outgoings.

In these instances, it’s likely that yours isn’t the only overdue invoice they’re sitting on.

Having good communication can really help with customers who are under pressure for cash. It may not prevent an invoice from becoming overdue, but if they can tell you honestly and openly what’s going on and when you can expect payment, you can make a reliable plan for the future.

Disputes

Queries or disputes over invoices lead to payment delays, even if they’re easy to sort out.

Often, if a customer wants to query an invoice, they won’t actually say anything – particularly if they want to avoid a confrontation. The problem with this approach is it just takes more time until you’re actually paid.

Errors on invoices are a big no-no, so take the time to make sure they’re accurate. Ensure invoices are as clear as possible to reduce needless disputes.

They forgot

As frustrating as it is, often there’s no good explanation why customers don’t pay an invoice on time. It may have gotten lost, not logged properly or simply missed.

The actual reason is almost beside the point, which is that they have an outstanding invoice which should be paid ASAP.

The good news with this, if there is any, is it should be fairly easy to follow up. While payment will be late, it probably won’t become a long overdue invoice.

Technical glitches

System errors, data entry mistakes and other technical issues can block scheduled payments from going through as they should. As above, this isn’t a sinister problem and should be fairly easy to resolve.

Internal payment cycles

Many businesses schedule all of their bills and invoices to be paid at a certain time of the month. This helps them to manage cash flow and creates predictability in their outgoings.

However, it can create an overdue invoice if you expect payment sooner than they plan on making it. For example, if you send an invoice that’s due on May 10th, but your customer routinely schedules payments for the 20th of every month, the invoice will be late.

Again, this comes back to communication – them understanding when you expect to be paid, and you understanding when they prefer to pay invoices.

If they’re a big customer, it may be that you need to adjust your expectations.

Effective tips to chase outstanding invoices

While the reasons for overdue invoices can vary, it doesn’t take much to reduce your overdue invoices and effectively chase outstanding invoices from clients.

Establish payment terms up front

Payment terms outline when you’ll send invoices, when they’ll be due, accepted payment methods and any late fees you charge.

By having these terms agreed from the outset, you set clear expectations that both you and your customer can refer back to if needed.

Make your invoices clear

Customers should be able to get all the information they need by glancing at the invoice. The most important information – your name, the amount owing, details of the work done, the due date and payment methods – should be clear and obvious.

Itemise your work to reduce needless queries or disputes that are easily solved, but not before creating an long overdue invoice.

Schedule regular reminders

Creating tactful invoice reminders is the best way to reduce the chance of an invoice slipping through the cracks and being forgotten about.

You can send emails before the invoice due date to ensure payment is made before an invoice becomes overdue. Late invoice reminders can also be scheduled in your online invoicing software to automate follow ups and not take up your own time.

Try sending a reminder a week before the due date, on the due date, and one and two weeks after payment was due.

Charge interest on overdue invoices

Charging interest on overdue accounts makes it in your customers’ best interests to pay invoices on time. It’s a legal requirement to communicate any late fees in advance, so be sure to include them in your payment terms if you plan on charging them.

Read more: Should you charge interest or late fees for outstanding invoices?

If customers are experiencing cash flow issues of their own, they’re likely to prioritise paying invoices that charge interest.

Send invoices to the right person

If your customer is a business, the person you’re used to dealing with may not be the person who processes invoices. In order to reduce handling mistakes or lost emails, send the invoice to whoever’s responsible for scheduling payments.

Send invoices promptly

Sending invoices soon after the work is completed not only brings forward the due date, but it means customers receive invoices when the work is still fresh in their mind. You’ll reduce the chance of queries or disputes because they’ll remember the details much better.

Take home message

No business owner wants to waste time chasing unpaid invoices, so make sure you take the time to improve your processes to reduce the chance of it happening.

Can you eliminate overdue invoices? In all honesty, probably not. However, you can set yourself up to effectively chase late invoices without requiring a lot of time and effort.

You can also take steps to deal with the impact of unpaid invoices on cash flow. Invoice finance creates the same effect as customers paying invoices on time, giving you the cash flow to cover all your outgoings.

Invoice finance with FundTap is a short term business loan that’s easy to qualify for, easy to get and quick to get approved.

Find out more about how FundTap works today.