Past due vs overdue invoices

If you're in charge of your company's invoicing, then you'll be no stranger to late payments. 

Invoice management alone could be taking up days each week. Or it could be your whole job, considering 48% of businesses handle up to 500 invoices every month.

You're not alone. Despite technological advances, late payments are still a chronic problem, with 87% of businesses saying that invoices are typically paid after the due date. 

When it comes to chasing people for payment, things get complicated. You need to understand the difference between past due or overdue invoices. It's a critical point which is often misunderstood.

Having an understanding of these invoice terms has a direct impact on collection strategies, cash flow forecasting, customer relationships, and accounting compliance. It's not just semantics.

So if you want to know everything from financial reporting to how aggressively you can pursue payment, then I'll go through everything step by step below, including:

• The definition of past due vs overdue invoices

• Invoice life cycle stages and management tips

• Tools to reduce the burden on your invoice management

Defining past due vs overdue invoices

What is a past due invoice?

The term "past due" references a payment or debt that has not been paid by a specific date. Generally, a payment becomes past due on the first day after the due date.

For example, when a customer does not pay an invoice by a certain date, like the first of the month, it would be classed as past due on the second of the month. Most companies classify past due as within a timeframe of 1 to 30 days after the due date of the payment terms.

At this point, it is best practice to send reminders to clients about the payment without chasing too aggressively. 

What is an overdue invoice?

The term "overdue" refers to payments that have not been paid by the expected date or given time frame. Typically, overdue is a status indicating a higher severity of lateness than when a payment is past due.

Usually, an overdue invoice is marked when payment is 30+ days beyond the payment term due dates.

Payment chasing can be stepped up a level. Late fees are usually activated and higher penalties put in place, plus it can lead to serious damage to the relationship between two businesses. At its worst point, this delinquent behavior on paying invoices can lead to engaging a collection agency or legal proceedings.

So the difference between past due and overdue invoices in a B2B setting is identified as short term (past due) and long term (overdue) payment delays. 

Direct comparison: overdue vs past due invoices

The different invoice lifecycle stages

Your invoice management should have distinct life cycle stages. Ensuring proper payment workflow helps you work efficiently and handle different situations that affect the business's cash flow.

With clearly outlined stages, you can appropriately communicate with your team, accounts department, and clients to ensure invoices are issued in a timely manner. It also ensures that the correct information is included, so it is easy for your clients to pay by the due date.

If clients are regularly missing due dates on invoices, then it can be due to poor management within your organization. For example, issuing invoices with missing payment information and short payment timeframes can make it hard for a client to hit the due dates.

If the bank details are incorrect or not using the correct currency for your client's needs, it will make it impossible for them to pay until this error is corrected. 

Short payment terms, such as "due immediately", make it hard for someone to pay in a timely manner. Not only does this cause inefficiencies in both businesses' workflows, but it could damage customer relationships. 

You'll get frustrated at unpaid invoices, and clients will get annoyed at sloppy payment processes. Here’s a breakdown of the invoicing life cycle stages:

1. Pre due stage

When an invoice is pre due (before the payment due date), this is known as "outstanding." An outstanding invoice is within the payment terms and simply references an unpaid bill that is waiting to be paid.

2. Grace period

With the prevalence of late invoices, many businesses provide a sort of informal grace period. In fact, many businesses won't declare an invoice past due until three to seven days after the due date.

If you are willing to offer grace periods, then you should be consistent even if they're not contractually stated. If a client is used to paying on a certain date every month that doesn't reflect your invoicing date, then suddenly chasing them for payment early can cause a strain on the relationship.

3. Past due stage

Technically speaking, this begins immediately after the payment deadline of the invoice, but you might be flexible in officially marking your invoices past due if you have a grace period.

If a particular client regularly misses deadlines and ends up being past due, and you don't want to provide a grace period, then it's essential to communicate this with the client. Give them a friendly reminder to make sure they're paying on time.

4. Overdue stage

Did you know the average time to pay in the UK has reached over 50 days? That means it's taking nearly two months on average for invoices to be paid from the moment they're issued. That's down to multiple factors, such as open account trading or 30 to 60 day payment terms.

But within that, there are thousands of businesses with overdue invoices of 30+ days. At this point, you need to be more formal in your collection process. Ensure you have terms and conditions to accompany your invoices, which explicitly state what happens to overdue payments. You might consider late fees, penalties, or ramp things up with legal proceedings and debt collection agencies.

5. Delinquent stage

The word "delinquent" formally means a failure in one's duties. When it comes to invoicing, delinquent invoice means just that, a payer has failed in their duty to meet their commitments over a long period of time. Generally, this could be 60 to 90+ days.

At this point, you'll likely need to engage with specialized collection services and legal proceedings. Things can get tricky when recovering payment, and debts run the risk of being written off if you don't get paid what you're owed.

Impacts on financial reporting

The classification of invoice payment status will have a direct impact on financial reporting.

In your balance sheet classifications, outstanding invoices would be classed as current assets and debtors. When things reach past due and overdue status, they can still be classed as current assets/debtors, but you'll need to add more disclosures and potentially an allowance for doubtful accounts.

When invoices are severely overdue, it might require reclassification or be recorded as a bad debt.

Cash flow is the biggest killer of businesses. Even the most profitable operations can end up going under if they don't have cash flow. It's the lifeblood of an organization.

While things might look good on paper, if you're racking up high volumes of overdue invoices, you're 1.5 times more likely to report bad cash flow issues. In the UK, SMEs lose on average £22,000 a year in productivity from unpaid invoices. And 1 in 5 businesses claim insolvency is down to late payments!

So the way you classify and report your unpaid invoices has a direct implication on the financial situation of a business. Get this wrong and it can mislead investor relationships, plus damage the long term viability of an organization.

How to manage past due and overdue invoices

So now you understand the different stages of an invoice lifecycle, let's go into a bit more detail about how you can manage each situation.

Past due invoice management (1 30 days)

With past due invoices, you want to remain friendly and pleasant and give the benefit of the doubt. Simple emails and phone calls are likely to smooth the payment issue. Generally, email reminders are effective in the majority of cases. An added phone call can resolve the problem 90% of the time if the emails are unsuccessful.

Overdue invoice management (30+ days)

If you reach an overdue invoice, then things start to get more formal in your communication approach. If you're not used to dealing with this severity of payment, then it's a good idea to escalate the situation to an accounts department manager or owner of a business. These are people who might have more command in dealing with slow paying clients.

Adding to this, documenting any conversations you've had along the way might help in the future if the payment still isn't resolved. Along with emails and phone calls, you might send a more formal written request for payment and involve more senior members of the late paying company.

Late fees are most effective when introduced at the overdue stage, typically ranging between 1.5% and 5%. Or you could opt for a fixed amount that is relevant to the invoice. Late payment fees are an incredibly effective way to recover payment. 

Delinquent payments management (90+ days)

If it reaches 90 days or more of an overdue invoice, then it's time to initiate legal proceedings. Small claims court can be a viable option for most invoices. They're cost efficient and simple. You can even access these services without the need for professional legal help, although for big payments, it could be wise to seek relevant legal counsel.

When engaging with collection agencies, don't necessarily expect to recover the full amount of payment. Usually, payments have been missed because the payer company is in financial difficulty. On average, a debt collection agency is able to recover anywhere between 20% to 50% of severely overdue invoices.

Best practices for invoice management

Unpaid invoices might seem like a minor issue, but they actually pose a serious threat to the viability of many businesses. At first, the situation might be manageable. But over time, a domino effect of late payments can cause rippling effects through the entire financial structure of a business.

So here are some top tips for managing the situation:

1. Cash flow management

Unpaid invoices affect capital efficiency. Money gets tied up or stuck in the system, which forces businesses to either dip into cash reserves or even rely on borrowing to bridge the gap. Ensuring your clients pay on time every time can have a massive upside for a company with a good track record of invoice management and payments. It opens up the ability to use facilities like invoice factoring to retain a smooth cash flow.

2. Digital platforms

Using a robust invoicing and payment platform can save hours of manual tracking every day. For many businesses, automation tools can speed up collections. Research shows that integrating digital transformation into your payments shows the most significant advantages of automation are:

• 49% of businesses experience faster payment

• 34% enjoy reduced errors

• 25% save time

Top invoicing platforms like Acctual don't just help you get paid, they improve customer relations too. This is because it offers complete flexibility. As a business, you can invoice in your chosen currency, and your customer can pay in their preferred currency.

For example, your invoice could allow a client to pay in US dollars, Euros, or even stablecoin cryptocurrencies, while you could receive funds directly into your crypto wallet or to your local bank in your local currency, whether that's NGN, CNY, or others across the world.

The evidence is clever: Easy payment means fast payment.

3. Preventative measures

Missing information from invoices is the leading cause of overdue and missed payments. It's important that your invoice includes all the correct banking details and payment methods for your clients, along with crucial elements like clear payment terms and dedicated due dates, plus relevant tax information for the jurisdictions.

Highly visual due date indicators can improve payment timeframes, and establishing this when starting a new relationship with clients will give your completion rates an extra lift.

4. Recovery strategies

When you have a past due or overdue invoice, simple personalized reminder calls and emails can increase success rates dramatically over generic emails. While some systems might offer automated reminders, it can be prudent to follow this up with a phone call or friendly email to the client, checking everything is okay with the payment.

Adding to this, you might even consider payment plans during a 15 to 30 day past due invoice. This is shown to increase acceptance rates as well, rather than persisting with trying to recover the full amount in one payment.

Some finance partners will even consider factoring on past due invoices, although this needs to be managed against recent debt and against a company with a good chance of collection.

So if you're struggling with cash flow at certain points, resorting to a credit card is not always the best solution. Speaking to your bank or financing partners can help resolve cash flow issues while you manage invoice relationships with late paying clients.

Reduce overdue invoices with Acctual

Chasing late payments is frustrating.

It requires walking a fine line between maintaining client relationships and getting paid. 

Plus, unpaid invoices are catastrophic for cash flow. 

That's the reason Acctual exists. It's everything you need to manage your invoices and payments

You’ll be surprised at the reduction in slow payment once you remove the difficulties of making payment. With complete flexibility in allowing your clients to pay however they want, payments arrive fast and efficiently straight into your bank or crypto wallet. 

It doesn't just maintain client relationships, it actually improves them, with both parties being able to work in their preferred currencies and payment methods.

Simply put: When invoices are easy to pay, they get paid fast.

You can try the free invoice generator to get started in seconds, so you never deliver an inaccurate invoice again. In five simple steps, you’ll have a perfect invoice:

1. Fill in your company details

2. Add your client information (customer logos are automatically found and inserted)

3. Input invoice details

4. Select fiat and crypto payment options

5. Outline terms, including the issue and due date

Then you can send your invoice directly to your client or download it to send manually.

Acctual even integrates directly with your accounting and ERP systems for smooth reporting, invoice tracking, and reconciliation.

It takes two minutes to get started with a free account today, and your accounts team will thank you for reducing the amount of past due and overdue invoices they're dealing with every week.