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Companies often offer customers the flexibility of paying for goods or services long after they are purchased to nurture long-term loyalty. The sum of money owed is known as accounts receivable (AR). Although payment timetables vary on a case-by-case basis, there’s no minimum or maximum time limit on AR outstanding. But, they are typically due within 30, 45, or 60 days of a transaction.
Key Takeaways
- Accounts receivable refer to money customers owe businesses for products they already used or services they already benefited from.
- AR outstanding are generally due in 30, 45, or 60 days.
- Businesses only offer buy-now, pay-later programs to creditworthy customers who pay off their debts quickly.
- AR are recorded as current assets on a company’s balance sheet because the cash from the transaction is typically forthcoming in under one year.
- Companies may offer discounts on balances to customers who satisfy their debts in advance of their agreed-upon payment schedules.
What Are Accounts Receivable (AR) Outstanding?
Accounts receivable represent money owed to a company by their customers for goods and services delivered. They are considered to be short-term assets that will ideally be converted to cash within one year of the initial transaction. Accounts receivable are typically reserved for the most credit-worthy customers—customers who have demonstrated track records of making timely payments.
To encourage prompt payments, companies may discount the balances owed for customers who make payments ahead of their determined due dates. This can help companies increase cash flows during accounting periods when they may experience hard times covering things like employee wages, materials purchases, or other routine expenditures.
There is no legal limit to how long companies can leave their AR unpaid. As noted above, most companies allow AR to go unpaid for a certain period—usually 30, 45, or 60 days. This often depends on the customer and their relationship to the company. For instance, a new customer may only be granted a shorter amount of time to repay the invoice while a long-time customer with a good payment history may be given longer—up to 60 days.
You can find a company’s AR under the current assets section of its balance sheet.
Planning for Unpaid Balances
AR usually comes in the form of unpaid invoices. As such, the customer has a contractual obligation to repay the invoice to the company that provides the goods or services. But, some customers may not pay, which means they are bound to default on their debts. This is why companies record allowances on their balance sheets that account for deadbeat accounts.
This number, which is a fixed percentage of the overall debts owed, varies depending on the sector and the individual business. Most businesses carry AR insurance to cover losses sustained from receivables that are paid off slowly or defaulted on entirely.
A company with accounts receivables listed on its balance sheet means it has sold products or services to its customers, but has yet to be paid.
Tracking Accounts Receivables (AR) Outstanding
AR can be tracked by several financial metrics. The AR turnover ratio measures how many times a company has collected its AR balance for a particular reporting period. A high ratio typically indicates that a company is collecting its receivables in a timely and efficient manner.
Another metric, known as days sales outstanding (DSO), shows the average number of days it takes for a company to collect on its AR after a sale is made. A high DSO indicates the company is prone to waiting for long periods for payment, which suggests management inefficiencies. This may concern investors because these companies are probably struggling to generate enough cash to pay for their short-term financial obligations.
What Does Accounts Receivable Outstanding Mean?
Accounts receivable outstanding refers to any money owed to a company that remains unpaid. AR is generally owed by a company’s customers for goods and services delivered. AR outstanding appears on a company’s balance sheet under the current assets section because they are considered to be short-term assets. This type of asset can be used by analysts and investors to calculate a company’s liquidity.
Are Companies Legally Required to Give Customers a Grace Period for Receivables?
There are no laws that force companies to give their customers a grace period to pay their invoices. This means that businesses can ask for cash upfront or provide invoices with a due date. Companies tend to offer invoice repayment within 30, 45, or 60 days. In many cases, companies may give their best customers longer periods to pay their invoices.
What Happens When an Invoice Goes Unpaid?
Companies have a few options when customers don’t pay their invoices. They can send notices or make collection calls to try to get their customers to pay. If that fails, they may choose to send the bill to collections and have another party try to collect the unpaid balance. This comes at a cost—usually a percentage of the balance. If the bill is still unpaid, the company may have to write off the balance as a bad debt.
The Bottom Line
Accounts receivable are a very valuable asset for businesses. They represent unpaid invoices for goods and services delivered to customers. Some companies may ask their customers for payment upfront while others may allow them to pay invoices after a certain time. These invoices are called accounts receivable outstanding. How long they remain outstanding, though, depends on the company and the relationship with the customer. In most cases, companies generally expect payment within 60 days of delivering their goods.
