What Is an Outstanding Check?

What Is an Outstanding Check?

Let me explain what an outstanding check is: it's a check you've written, but the payee hasn't cashed or deposited it yet. You're the payor who issues it, and the payee is the one it's made out to. It can also mean a check that's been presented to the bank but is still processing in the clearing cycle.

This outstanding check is a liability for you as the payor. You need to keep enough money in your account to cover it until it's cashed, which might take weeks or even months. If it stays outstanding for a long time, it becomes a stale check.

How Outstanding Checks Work

You might use checks to make payments in transactions. A check authorizes your bank to transfer funds from your account to the payee's. When the payee deposits it, their bank requests the funds from yours, which then withdraws the amount and sends it over. Once received, it's deposited into the payee's account.

The check becomes outstanding if the payee doesn't cash or deposit it right away. It won't clear your account or show up on your monthly statement. It remains a liability for you until the payee deposits it and you reconcile it against your records.

If checks stay outstanding too long, they can't be cashed because they become void. Some get stale after 60 or 90 days, others after six months.

Risks of Outstanding Checks

Outstanding checks aren't always bad, but they come with risks. An overdraft can happen if you wrote the check and don't have enough funds when it's finally presented, leading to an overdrawn account. You might have had enough at the time of writing, but spending in between can cause non-sufficient funds issues.

There's also fraud risk: if the check is lost or stolen, someone could alter the payee or amount before it's banked. Deposit checks quickly to avoid tampering.

Accounting inconsistencies can occur if you don't track them properly, making financial records hard to maintain and causing audit or reconciliation problems. For instance, payments might appear paid but the cash hasn't been debited yet.

Finally, they affect cash flow management. A lot of uncashed checks create uncertainty about available cash, complicating expense planning.

Benefits of Outstanding Checks

There are benefits too. Checks allow payments without immediate cash or electronic transfers. If a check lingers, it gives you more time to gather funds if needed.

Checks provide a paper trail for tracking payments, with records of date, amount, and payee for both sides. An outstanding check might just be the delay from mailing to receipt.

They offer payment delays for cash flow advantages. You control the timing of fund withdrawal, and any delay means you earn more interest on the balance.

How to Avoid Outstanding Checks

Forgotten outstanding checks often cause overdrafts. Maintain a balanced checkbook to prevent NSFs if the payee cashes it later.

Call or write the payee to remind them about the check. This might prompt them to deposit it or alert you if it's lost, so you can reissue.

Use your bank's online bill pay for real-time info on outstanding checks and account balance, avoiding forgotten paper checks.

Outstanding Business Checks

When a business issues a check, it deducts the amount from its general ledger cash account. If not cashed, the bank account shows a higher balance than the ledger.

To reconcile, adjust the 'balance per bank' on the statement to match your financial statements by accounting for outstanding checks.

Communicating Outstanding Checks to Payee

Businesses must follow unclaimed property laws, remitting long-outstanding checks to the state. There's no benefit in hoping a check never cashes, as the payment goes to the government.

Communicate promptly with payees about issued checks and details. This sets expectations and helps them plan. Consider mail delays from seasons, weather, or staffing.

Provide accurate contact info so payees can reach you with questions. Checks can go missing due to wrong addresses.

Record all communications about outstanding checks, including emails and calls. Check past-due invoice statements against payments to catch lost or mismanaged checks.

What Happens If a Check Is Outstanding for Too Long?

If outstanding too long, it becomes stale-dated, and the bank may refuse it. The payee should contact you for a new check.

How Do I Reconcile Outstanding Checks with My Bank Statement?

Compare issued but uncleared checks with the statement. Subtract outstanding checks from the bank balance on your reconciliation sheet, as they're pending withdrawals.

What Are the Consequences of Bouncing an Outstanding Check?

Bouncing leads to bank fees, credit damage, and possible legal action from the payee. Track outstanding checks before reducing your balance.

What Are Some Best Practices for Managing and Clearing Outstanding Checks?

Reconcile bank statements regularly, void unused checks promptly, keep good records, and communicate with payees about unprocessed payments.

The Bottom Line

Outstanding checks are issued but not yet presented or cleared, representing pending deductions from your account. They pose risks like overdrafts, fraud, and discrepancies, so manage them through tracking, reconciliation, communication, and ensuring funds are available.