Some businesses can operate successfully on a cash-only basis, but that model is pretty hard to sustain once you get past the mom-and-pop stage. It's especially difficult if you sell to other businesses who often don't expect to pay in advance for their purchases. Instead, you'll create an invoice for your product, which your customer will later pay. During the time between the invoice being issued and the customer paying it, it's described as an open invoice for accounting purposes.
Vendor Invoice Definition
Accounts Payable, Accounts Receivable
Closed Invoice Definition
Partial Payments Complicate Things
It's relatively simple to keep track of an open invoice and change it to a closed one if it's cleared with one single payment in full. It's a bit more complicated if you make or receive partial payments on the same invoice over a period of time. The basic process of posting to the accounts payable ledger if you're the customer, or the accounts receivable ledger if you're the vendor, remains the same. The difficulty lies in making sure the cumulative total of payments is correct, once you've calculated any interest penalties, and that they're assigned to the right invoice. Some third-party services and software products, such as the aptly named OpenInvoice.com, automate and streamline this process.
The Invoice Discounting Option
It's not uncommon for businesses with lots of open invoices to experience transient cash flow problems while waiting for those invoices to be paid. In those situations, some businesses turn to the option known as invoice discounting. A third party advances money to the vendor against an outstanding invoice in exchange for a percentage once the invoice is collected. Responsibility for collecting payment remains with the vendor. This can be a useful tool in a time of need, but it eats into your margins, so you'll want to carefully weigh your short-term needs against your long-term profitability.
Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.