When it comes to applying payments, should they be allocated to the oldest invoices or according to the customer’s preference?
Consider a situation where a customer has a past due invoice of $100 and a current invoice of $100, totaling $200 owed. If they make a $100 payment but specify that it’s meant for the new invoice rather than the past due one, how should the payment be processed?
Should it be used to settle their outstanding balance, or should it be applied to the newer invoice as requested by the customer?
One response
This situation can be a bit tricky and often depends on the policies of your business and how you want to handle customer payments.
From a financial perspective, many companies prefer to apply payments to the oldest outstanding invoices first. This approach can help reduce the overall aging of receivables and minimize the risk of bad debts. By addressing past due balances first, you ensure that older obligations are settled before newer ones, which can be more beneficial for your cash flow.
However, customer preference is also an important factor. If the customer explicitly states that their payment is intended for the newer invoice, you might consider honoring their request as a means of maintaining good customer relations. It can be a good practice to communicate with the customer, clarify their intentions for the payment, and also remind them of the outstanding balance.
In summary, while applying payments to the oldest invoices is generally a good practice, it’s important to strike a balance between your policies and customer preferences. You could also document the conversation with the customer to support your decision and maintain transparency.