How Long Can Accounts Receivables Remain Outstanding?

In an effort to nurture long-term loyalty, companies may offer customers the flexibility of paying for goods or services long after they are purchased and consumed. The sum of money owed is known as accounts receivable. Although payment timetables vary on a case-by-case basis, accounts receivables are typically due in 30, 45, or 60 days, following a given transaction.

Key Takeaways

  • Accounts receivables refer to money customers owe businesses for products they already used or services they already benefited from.
  • There is no fixed timetable for paying back accounts receivables, but they are generally due in 30, 45, or 60 days.
  • Businesses only offer these buy-now, pay-later programs to credit-worthy individuals, with track records of responsibly paying off their debts in an expeditious manner.
  • Accounts receivables are recorded as 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.

Understanding Accounts Receivables Outstanding

Accounts receivables, which are typically reserved for credit-worthy customers with demonstrated track records of making timely payments, are listed on a company's balance sheet. Accounts receivables are considered to be short-term assets that will ideally be converted to cash within one year of the initial transaction. But to encourage prompt payments, companies may discount the balances owed for customers who make payments ahead of their determined payment periods. This can help companies increase cash flows during accounting periods where they may be experiencing hard times covering employee wages, materials purchases, or other routine expenditures.

Planning for Unpaid Balances

A certain portion of customers are bound to default on their debts altogether. For this reason, 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. In any case, most businesses carry accounts receivable 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 Outstanding

Accounts receivables can be tracked by several financial metrics. The accounts receivable turnover ratio measures how many times a company has collected its accounts receivable 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 accounts receivables after a sale has been made. A high DSO indicates the company is prone to waiting for long periods of time, which suggests management inefficiencies. This may concern investors because such companies are likely struggling to generate enough cash to pay for their short-term financial obligations.