Unapplied payments and credit memos: why paid clients still get chased

The most embarrassing reminder a client can send is the one for an invoice the customer already paid. It happens often enough that most bookkeepers have a story about it. The cause is usually not the customer and not the client. It is money sitting in the books that has not been matched to the invoice.

This post is about the two places that money hides in QuickBooks Online, and how to clear them before anyone sends a chase. Menu names change, so check each step in your own file.

Hiding place one: a payment that was never applied

A customer pays by transfer or check. Someone records it as a payment, or the bank feed picks it up, but it is not linked to a specific invoice. The cash is in the books. The invoice still says open, and the balance owed still shows on the customer.

You will see this most when:

• the customer paid one lump sum for several invoices
• the remittance did not say which invoice it was for
• the bank feed matched the deposit to the customer but not to the invoice
• a payment arrived early, before the invoice was sent

An open invoice with a recent payment from the same customer is the pattern to look for. If the amounts add up, the payment is probably unapplied.

Hiding place two: a credit memo nobody used

A credit memo is what you raise when you owe the customer something: a returned item, a pricing correction, a discount agreed after the fact. If it is never applied to an invoice, it sits there and the customer's invoice stays open at full value. The customer, quite reasonably, believes they owe less.

Reminding someone for an amount they think you already credited is a good way to start an argument. It also tells them nobody is looking at the account.

A ten minute check before the weekly chase

For each client book, before you send anything:

1. Open the customer list and sort by balance. Pick any customer with several open invoices. 2. Look for payments or credit memos dated after the oldest open invoice that are not linked to anything. 3. If one covers an invoice, apply it, then re-read the balance. 4. If a payment is a different amount from any invoice, ask the client before guessing. Part-applying the wrong invoice just moves the mess. 5. Re-run the aged receivables report. Our guide to reading one explains what the buckets mean.

Do this on the same day each week and the pile stays small. Left for a quarter, it becomes a reconciliation project.

What a reminder tool should do about it

A reminder tool that only reads invoices will chase these customers. It sees an open invoice and does its job. A better one also reads the credit and the unmatched payments and holds the reminder.

Mugavi does this for QuickBooks. It reads credit memos and unapplied payments, and if a customer holds credit that covers what they owe, it stops chasing and shows you why, so you know to apply the credit in your books. Here are the limits, stated plainly:

• The QuickBooks connection is in beta. This logic has been tested against stand-ins and a test database, not a real QuickBooks company, and QuickBooks has not yet confirmed it accepts the filter we use to find unapplied payments.
• Partial credit does not stop a reminder, and the credit is not mentioned in the email.
• It does not apply the credit for you. You do that in QuickBooks.

Because every reminder also waits for your approval by default, a wrong one can still be caught by you before it goes out. See why a reminder has or has not gone out for how to read the reason on any invoice.

If you are doing this for many clients

Add this check to the engagement. Tell the client you will apply payments and credits that you can match, and that you will ask about the rest. It makes the first month of invoice follow-up as a service much calmer, because the first reminders go out on invoices that really are open.

The tool is Mugavi for bookkeepers, $399 a month for ten client books. Start with one book and compare what it flags against what you already know is unapplied.

Related reading: reminding for the balance on part-paid QuickBooks invoices.