Late Invoices

12 Nov, 2024

⏲ 6-minute read | last updated 9 months, 1 week ago

So you get an unexpected invoice from a vendor. Maybe they sent it later than they were supposed to (like six months, or a collection of invoices for unbilled services over a year). Maybe it’s for work you didn’t authorize, or a part you didn’t order. Or a litany of other unique situations - regardless of the cause, what's the right response?

A Quick Aside - Big & Small Companies

The bigger you are as a company, the higher the expectations other companies have from you. Get big enough, and your business starts evolving new departments. They’ll specialize in all sorts of things: legal will have attorneys to answer official stuff, accounting will track how much money your stuff makes, compliance make sure your stuff follows the rules, etc.

Probably though, one of the first functions you’ll evolve is Accounts Receivable (AR). You get a real bang for your buck with an AR department because (i) it's not too expensive to set up, and (ii) having someone whose full-time job is to figure out who owes you money is an excellent investment.

AR ensures your company appropriately jumps through the hoops other companies require from you to get paid. They’ll keep track of PO numbers and put them in the right places on invoices, they'll check all the right boxes, send W9’s, confirm banking information, and just generally make sure the path is clear to collect the money you’re owed.

Which is why you generally only see unexpected invoices from smaller operations.

Over times, when something expensive happens to a business, it learns and develops policies around it¹. When it comes to receivables, small businesses just haven’t had enough time go by to have policies around everything that goes wrong when trying to collect money. They might have someone dedicated to AR, but they aren’t really good at AR yet.

So if you're a small operation, it’s a lucrative behavior to sift through your accounts and look for anything you haven't yet billed. Chances are:

1. There probably is something.
2. If you do this for all your customers, and ask them nicely enough, some portion of them will pay.
3. If you do nothing, you definitely don't get paid.

From a cost-benefit perspective, it's a good use of time.

What Do You Do

So back to the original question on what to do with an unexpected invoice. Ultimately it boils down to three choice.

1. Pay it.
2. Don’t pay it.
3. Pay some of it.

Pay It

You could just pay the invoice. If you're a big company and have lots of money, then most likely any one particular instance of a vendor submitting an unexpected invoice doesn't really move the needle or make a meaningful impact to your business. In many cases, the opposite is true - a disruption to the goods/services you're receiving from that vendor will have a material impact on operations.

In these cases, a slap on the wrist from you is a bit of a win-win for everyone. It doesn't matter to you, the vendor gets paid, and everyone is happy. This is especially true for smaller vendors you're working with as that money is, in an absolute sense, much more meaningful to them than it is to you.

Even if you’re not a big company, maybe the invoice amount is immaterial to you. It might be a better use of your time to just pay it than invest in the hours required to litigate it.

Don’t Pay It

You could also just not pay it, and deal with the consequences.

That payment might be significant to the vendor, and despite their error in its late submission, it's something that you've budgeted for already. Not paying may have a material impact to them. Plus, what would that do to the relationship? Is that important to you?

Business relationships, mostly, are about making money. That’s always an easy place to start any negotiation (“we want you to make money, we want to make money, and we’re going to work together to do that”). It’s implicit in any B2B transaction. If a vendor working for you never makes money, trust erodes and things break (service gets worse, quality suffers, or you end up fighting off tit-for-tat invoicing).

Not paying the invoice could break that implicit agreement, which is kinda an issue, as that’s the whole point of being in business together.

On the other hand, maybe you have good reason not to pay. It could be that the invoice is a true surprise. If you had no previous idea that you owed this money, a good strategy in talking about such issues is the good faith “if you had known” argument.

• If you knew you owed this money, you might have budgeted for it.
• If you knew this work needed to be done, you might have bid it out to multiple vendors.
• If you knew about the work, maybe you would have exercised one of your existing internal resources to handle it.
• If you knew about the purchase, maybe you would have reduced scope in other areas.

In submitting the invoice late, the vendor has effectively eliminated your freedom of choice and made the decision for you. They've acted on your behalf without consultation, and by submitting the invoice after-the-fact, are asking you to pay for their decision. Not cool.

Pay Some Of It

There’s good arguments for paying just some of it too. If the scenario isn’t black and white, then culpability probably isn’t uniform either.

In these cases, figuring out all the details surrounding an issue brings a clear idea of the right decision.

• Where was the mistake made? Why is the invoice coming in late? Is it past the invoice submission timeline in the contract?
• Is it for extra goods/services? Was there scope creep that wasn't authorized? Did someone agree to it? Is that written down somewhere?
• What would be your alternatives if you didn’t get the thing you paid for? Have you been profiting off of it? Is it super valuable to your business?
• What happens if you don’t pay it? Will it put the vendor out of business? Will it ruin the relationship? Will it jeopardize future projects?
• How many other suppliers are there that can do this work? What kind of disruption in business would it cause?
• What's the vendor's payment history? Is this a pattern of problematic invoicing or unapproved work?
• What's the industry standard for similar situations? Is there a fair precedent for these type of situations?

You get the idea.

What’s Fair

Ultimately, the easiest way to decide what to do is to make a principled decision, or just do what’s fair. In addition to being able to rest easy with your decision, this also has the added benefit of being the simplest thing to get the vendor to agree to, too.

Explore the issue, learn the interests of the other party (and let them know yours), and establish some objective criteria you both can agree to in coming to a decision. Then, decide! Y'all probably won't sue each other over it; or, if you do, it'll be a good chance to put those legal departments to use!

#procurement