How should startups manage unpaid customer invoices?

Process for Managing Overdue Customer Invoices

1. Payment Reminder Process

Use a structured reminder schedule to encourage timely payment while maintaining good customer relationships.

• 7 days before due date: Send a friendly payment reminder with the invoice and payment details.

• On the due date: Send a payment due notification.

• 7 days overdue: Send the first overdue reminder requesting immediate payment.

• 15 days overdue: Follow up by phone or email to confirm receipt of the invoice, identify any payment issues, and agree on a payment date.

• 30 days overdue: Send a formal overdue notice stating that the account is delinquent and may be escalated if payment is not received.

• 45–60 days overdue: Escalate to senior management or the collections team. Consider placing the customer on credit hold until outstanding balances are cleared.

• 90+ days overdue: Evaluate further collection actions, including engaging a collection agency or initiating legal proceedings, where commercially appropriate.

2. Accounts Receivable Aging Reports

Prepare and review an Accounts Receivable (AR) Aging Report at least weekly (or monthly for lower transaction volumes).

The report should classify outstanding balances into aging buckets such as:

• Current (Not Yet Due)

• 1–30 Days Overdue

• 31–60 Days Overdue

• 61–90 Days Overdue

• Over 90 Days Overdue

Management should review the report regularly to:

• Identify overdue accounts.

• Prioritize collection efforts.

• Monitor customer payment behavior.

• Assess cash flow risks.

• Identify accounts requiring escalation or provisioning.

3. Escalation Process

Escalate overdue invoices based on age and risk.

Invoice Age Action Owner 1–30 days overdue Routine reminders and follow-up Accounts Receivable Team 31–60 days overdue Direct discussion with customer; notify Sales/Account Manager Finance & Sales 61–90 days overdue Escalate to Finance Manager; suspend further credit if appropriate Finance Manager Over 90 days overdue Executive review; consider external collections or legal action Finance Director/Management

Document all customer communications, payment commitments, disputes, and actions taken.

4. Accounting Treatment of Overdue Invoices

Accounting treatment should comply with the organization's accounting policies and applicable accounting standards.

• Continue recognizing the receivable until there is evidence that collection is unlikely.

• Assess overdue balances periodically for collectability.

• Record an allowance for doubtful accounts (expected credit loss provision) when collection risk increases.

• Review provisions at each reporting period and adjust as necessary.

• Write off invoices only after appropriate approval confirms that recovery is unlikely. The write-off should reduce both the receivable and the related allowance (or be recognized as bad debt expense if no allowance exists).

• If payment is subsequently received after a write-off, record the recovery in accordance with the organization's accounting policy.

5. Governance and Monitoring

• Reconcile the Accounts Receivable ledger regularly.

• Review aging trends during monthly finance meetings.

• Monitor key performance indicators such as Days Sales Outstanding (DSO), overdue balances, collection effectiveness, and bad debt percentages.

• Maintain complete documentation of reminders, customer correspondence, payment plans, approvals, provisions, and write-offs for audit purposes.

This process promotes timely collections, improves cash flow, supports consistent customer follow-up, and ensures appropriate financial reporting for overdue receivables.