Outstanding Payment Meaning & Strategies for Collecting Them
August 26, 2023
Collecting an outstanding payment, whether from a client or a fellow business, can prove challenging, especially for small businesses.
Having one or more clients incur unpaid invoices can leave your business with significant financial setbacks, which is why it’s important to have a policy in place to prevent or reduce these issues.
Fortunately, there are quite a few different ways you can regulate the occurrence of unsettled or outstanding balances from your clients and business partners. Keep reading to learn how to track client payments better and keep your business protected from possible losses brought on by overdue invoices.
- An outstanding payment is any amount in a client’s invoice that is unpaid. It is different from an overdue payment, which is an unfulfilled balance that is already past the due date.
- Creating an elaborate outstanding payment policy in conjunction with your company’s payment terms effectively reduces instances of late payments and non-payments.
- Unsettled outstanding or overdue invoices leave large gaps in your business’s financial health and can significantly impact your success.
What is an Outstanding Payment?
An outstanding payment, also called an outstanding invoice or outstanding balance, is the total amount on an invoice that remains unpaid.
Note that outstanding payments have not yet gone past the payment deadline, but we’ll dive deeper into the differences between outstanding and overdue payments in the next section.
The meaning of outstanding payment also applies to businesses when a vendor owes their suppliers or creditors a payment. An outstanding invoice, particularly one issued for a loan, can also include interest charge fees, balance transfers, and cash advances.
In a typical transaction, the business sends an invoice to the client to request payment for their products and services. The invoice contains the total amount due, including the deadline for the customer to settle their balance.
The customer is then obliged to fulfill their end of the bargain and ensure they pay for what they purchased. It is crucial that sellers and businesses inform their customers of the payment terms for their goods and services.
Outstanding vs. Overdue Payment
At first glance, the terms outstanding payment and overdue payment seem to refer to the exact same thing, but there’s an important distinction between an outstanding balance and an overdue payment.
When a client has an outstanding balance, it means they have an existing balance or unpaid amount on their billing statement, but that doesn’t necessarily mean the deadline for the payment has been exceeded.
An overdue payment, on the other hand, is money for a service, product, or subscription that remains unpaid after the set due date.
Overdue payments usually indicate that the client did not honor or acknowledge the business’s payment conditions.
The Importance of Monitoring Outstanding Payments
A business needs a steady cash flow to thrive and expand. Monitoring customer invoices and securing timely payments are essential to preventing bankruptcy and maintaining good financial health for the business.
When an invoice remains outstanding or unpaid, it slows down business operations in such a way that business owners cannot make timely payments to suppliers and follow their budget accordingly.
The amount that a client or business owes to their fellow business is money that could have been used to purchase raw materials and equipment, pay utilities and debts, and compensate employees.
If a vendor has an outstanding balance meant to be paid to a supplier or creditor, the balance is recorded as accounts payable (AP) on their general ledger. AP only includes short-term debts or payments for invoiced services and items.
It does not include long-term debts such as bonds, lease contracts, or payroll. At the same time, accounts payable is different from accounts receivable because the latter refers to payments that clients owe to a business in exchange for invoiced goods and services.
Accounts receivable are recorded as current assets on a business’s balance sheet.
Effects of Outstanding Payments on Businesses
Outstanding payments create a ripple effect of financial and operational setbacks for your business. It disrupts your cash flow and budget plan and leaves you, your client, and your supplier with a string of debts.
Suppliers cannot acquire new raw materials and replenish their stocks, while businesses are unable to entertain new clients, produce more products, and complete pending tasks and projects.
Subsequently, employees of a small business may experience delays in receiving their salaries since the business has insufficient funds to cover all office expenses and process payroll.
Unpaid employees eventually become unsatisfied and unhappy and leave the company for greener pastures and more consistent pay. When mass resignations happen, business owners are forced to deal with the sudden drop in manpower on top of their growing financial constraints.
Unless businesses are adamant about collecting all of their clients’ dues, their operations are bound to cease permanently in no time.
How to Efficiently Handle Outstanding Payments
The lack of a solid and stringent payment policy leaves businesses with zero ground and no protection against non-paying clients.
Delinquent customers can easily find their way out of their existing payment obligations if there are no contracts or legal agreements governing the transaction that hold them accountable.
That said, below are the steps for handling outstanding payments to boost financial security for the business:
#1. Create an Outstanding Payment Policy
The first and most vital step in handling outstanding payments is to specify your payment terms.
Your payment terms include key information about each transaction or sale, such as:
- Invoice number and date
- A definite payment due date
- Acceptable payment methods
- The total amount owed by the client
You can also include other conditions you have before completing your end of the transaction. For instance, you may specify that a client incurs interest or penalties if they fail to send payment on time.
Once your payment policy is done and dusted, ensure that it is accessible to your clients. If you have a business website or a social media page, make your payment terms and outstanding payment policies public so your clients and potential new customers can read them fully.
Don’t forget to provide your business’s contact information and entertain clarifications regarding your policy.
#2. Engage the Team
Aside from your customers, your staff must also know your payment policy by heart. This is especially true for your customer support team, since they are tasked with reaching out to clients with outstanding invoices.
Provide proper training for your customer support team and demonstrate the different steps in the business’s collection policies. Show them the ropes when it comes to sending initial and follow-up payment reminders, and inform them of the different scenarios when outstanding balances may be escalated to a supervisor or a collections agency.
You can also include your sales team, project managers, and accounting department in the training process. After all, project managers interact directly with clients in B2B settings, while the sales and accounting departments handle your company’s expenses and revenue.
#3. Ensure the Policy is Known to Clients
As mentioned earlier, it is necessary to communicate the policy to your clients. Otherwise, they can easily brush off your payment reminders and ignore their existing debts.
Aside from elaborating on your policy on your website or page, another key way to convey your terms is by issuing a contract or agreement to your client before commencing the transaction.
In doing so, customers are well informed of their limitations and obligations in fulfilling the sale or exchange of goods.
Let’s say the contract is between you and a supplier. The agreement specifies the requested services and goods, the total amount due, accepted trade credits, and the different responsibilities that each party must carry out.
Another example involves explaining that part of your outstanding payment policy is to send them an outstanding invoice email to remind them of their existing balance.
Make sure that your clients agree and accept the terms or policy by having them sign the agreement. When a client signs the contract, it means that they accept their share of responsibilities in purchasing your services and goods.
#4. Construct a Follow-up Procedure
Constructing a consistent and elaborate follow-up procedure guides your staff to know the acceptable courses of action for securing client payments.
Some of the most common practices done by established companies include sending an outstanding payment reminder at different stages of the client’s nonpayment. In short, you can create email templates or phone spiels for initial, follow-up, and final notices.
In this manner, you can segregate clients with long-overdue payments from those who only have outstanding balances on their invoice.
The follow-up procedure also specifies the different personnel and departments in your company with integral roles in ensuring the client fulfills their payment.
If a client refuses to fulfill their balance due to an invoice dispute, your customer support staff will know how to probe deeper into the client’s concern and ultimately determine whether to endorse the client to your tech support or accounting team.
#5. Take Legal Action
Seeking legal action is a last-resort method of handling outstanding balances and overdue invoices. It is often done when a client notoriously ignores all payment and invoice reminders and refuses to cooperate.
However, there are key considerations to observe first before deciding to file a lawsuit against your client:
- How much is the amount owed? Is it worth incurring additional expenses to cover the costs of litigation? Do you have enough resources and time to see the legal proceedings through to the end?
- Are you willing to negotiate? What if the client has an acceptable reason for not being able to pay their dues on time? Surely, you can make exceptions for clients who were forced to prioritize unforeseen events in their lives, thereby incurring late payments and penalties. Negotiating your terms is best if the client voluntarily expresses their willingness to compromise and settle all their overdue balances.
- What about other business costs? Taking legal action against a client or a fellow business is no cakewalk. It affects your operations and other business expenses. Filing a lawsuit while unprepared means draining funds from your accounts that are supposedly meant for other key areas of maintaining your business.
Meanwhile, if you have consulted your attorney and are well-equipped to seek legal proceedings, you can send a formal demand letter to the client in question. The demand letter specifies the amount owed by the client and the possible legal action you will take should they continue to ignore your notices.
The letter may also demand that the client or defendant settle their dues on or before a specified deadline. Otherwise, let the client know that they may be requested to appear in a court of law to defend their delinquency.
Outstanding Payments Best Practices
Here are additional tips and best practices to effectively manage outstanding payments:
1. Track Payments and Invoices Regularly
Keep your accounting books and expenses well organized. Separate paid from unpaid invoices, and create a record of all your invoices and pending client payments.
See that your record contains all the necessary details of every purchase. That means listing down the invoice number and date, the payment due date, and the existing balance. Add the account holder's name and update the declared outstanding amount once it incurs additional charges and penalties.
Keep your lines open as well—a client might try to reach out and inform you beforehand of their inability to pay their dues before the deadline. While tracking payments is crucial, allowing your clients leeway to settle their payments is just as important.
#2. Set up Recurring Payments
Setting up recurring payments is applicable for customers who signed up for subscription plans for your services.
Prepare an outstanding payment letter and notice to send to your clients once a significant amount of time has passed and their account remains unsettled.
#3. Request Payment Upfront
Requesting payments upfront is a smart way to secure compensation for your services and prevent the possibility of a client evading their dues.
Businesses that offer custom products typically issue an advance invoice because they need to cover the expenses associated with acquiring the materials to produce a specific item. Upfront payments are also recommended if the client orders items in bulk or wants to reserve items or goods that are limited in stock.
#4. Use an invoice generator
Invoice generators are highly convenient and practical, especially for small businesses and mid-sized enterprises. They use invoice templates that you can fill in with all the transaction and client information within minutes.
As such, you get to generate invoices in real time and ensure your accounting books are up-to-date regardless of the volume of orders you handle daily.
The use of an invoice generator lets you download or print digital and paper-based copies of your invoices for future reference.
Managing every outstanding payment from your clients is a great way to shield your business from severe financial losses and closure.
Remember, there is no amount that is too little once it starts accumulating additional charges and interest. The longer it takes for a client to settle their dues, the harder it will be for your business to recover and resume regular operations.
Outstanding Payment FAQ
#1. Does outstanding payment mean overdue?
No, outstanding payment does not mean overdue payment. An outstanding payment is any balance or amount that remains on a client’s invoice. It does not necessarily exceed the set due date for the invoice.
#2. Do outstanding payments expire?
Yes, outstanding payments expire. However, the expiration of outstanding balances will depend on the country. In the US, outstanding payments expire after six years.
#3. What is the opposite of outstanding payment?
The opposite of an outstanding payment is a paid-off or settled balance. When outstanding payments are declared cleared, it means that the client has sent the pending amount in their invoice to the seller.