An efficient invoice processing system is important for any business organisation. Timeliness and accuracy are critical to its success. Errors in invoicing create doubt in the customer’s minds, resulting in outstanding invoices and delayed payments.
An invoice is a time-stamped document that contains particulars of goods and services provided and their value which has to be paid by the recipient of such goods or services. An outstanding invoice is a term used for a sales invoice sent to a client but is pending payment. An essential requirement with regard to invoices is that they always specify the due date for payment. Until the payment of the invoice hasn’t been made, it will be termed as an outstanding invoice.
For instance, net 60 means the payment is expected to be cleared within 60 days after the date of the invoice. During the period that it remains unpaid, the invoice will be referred to as an outstanding invoice.
Following are the reasons why the invoice is classified as outstanding:
Payments in the business world are not always made on time due to certain inconveniences that crop up from time to time. Events like these hurt the cash flow and the working capital of the business. However, although they cannot be put to a complete stop, the occurrence of delayed payments can be considerably reduced. Here is how it can be done-
When a client is given options regarding the mode of payment, it facilitates quicker payments since they are given the flexibility of doing the same. This is a win-win for both the client and the business since the convenience factor plays a major role. Considering the advancement in digital payments today, modes such as the UPI route can facilitate the instantaneous transfer of funds.
By introducing incentives such as discounts and rebates for early payments, there is a higher chance of payments being made as early as possible since everybody loves a bargain. Timely payments require a certain sense of discipline, and in that spirit, charging a penalty in the form of interest where the payment is not made on time encourages the client to be prompt with payments.
Once the invoice is sent to the client, it is always a healthy practice to remind the client. A notification can be sent through the phone, email or any other medium. When sent, reminders must be professional and polite to maintain a healthy relationship with the client.
The solution to dealing with clients who do not pay or who make irregular payments is to stop fulfilling their order requests until they clear their dues. If not, the dues will continue to stockpile without any consideration being received for these goods so supplied. This will send a message to the client that the supplier is not to be taken for granted.
In any event, where the outstanding invoice remains unpaid past the due date, it gets reclassified as an overdue invoice. When this takes place, it is always advisable to have an “Overdue” watermark or stamp on the invoice to notify the client of the current status of the unpaid invoice. The overdue invoice must be sent to the client as soon as reclassified to settle the payment and avoid further action.
If the relationship with the client has turned sour and the probability of receiving the payment seems bleak, the business may hire a debt collector to recover the outstanding dues. Debt collectors are extremely professional in their approach. However, they do keep a portion of the dues for themselves. The business must be ready to forego a part of the total invoice amount. Where everything else fails, the final step would be hiring a lawyer and taking legal recourse regarding the matter.
These two terms are often used interchangeably, but the fact is, they are not the same. Invoices are classified as outstanding invoices if the amount is unpaid, but the last date for payment hasn’t passed yet. However, if the invoice stands unpaid beyond the last payment date as per the terms of payment agreed upon, the invoice will be classified as an overdue invoice. Overdue invoices pose a significant business risk since they adversely affect the cash flow of the business.
Often, the question that pops up is how successful small businesses in recovering their dues are? Does legal recourse always yield results, or does it do more harm than good to them? Are there any avenues of protection and recourse available for small businesses?
The provisions under the Micro, Small And Medium Enterprises Development Act (MSMED Act) come to the aid of small businesses. Section 16 states that if any buyer fails to make the payment to an MSME supplier as per agreed terms or a maximum of 45 days, the buyer would then be liable to pay interest to the MSME supplier. The buyer’s interest liable to be paid is compound interest with monthly rests to the MSME supplier at three times the bank rate notified by the RBI.
|Sl. No.||Scenario||Date from which interest is payable|
|1||No agreement between the buyer and MSME supplier||From the appointed date |
(Appointed date refers to the day immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier)
|2||Credit period is 45 days or less||Next date following the expiry of the credit period|
|3||Credit period is more than 45 days||45 days from the date of acceptance|
MSME Samadhaan Portal
The MSME Samadhaan Portal is an initiative undertaken by the MSME Ministry to protect the MSME supplier where cases of delay in payment occur. It is also called the Delayed Payment Monitoring System. It aims to take corrective actions and settle any disputes regarding non-payment that may arise in the ordinary course of business.
Trade Receivables Discounting System (TReDS)
The Reserve Bank of India (RBI) has initiated a digital platform for the MSMEs to auction their trade receivables to gain access to more capital funding. On this platform, the role of the financiers will be taken up by factoring companies, banks and non-banking financial companies, whereas the MSMEs will perform the role of the seller in the transactions.