What it means
When you run a business, tracking your cash flow accurately is vital for survival. You might write a cheque to a supplier on Monday and immediately subtract that amount from your internal ledger.
However, your bank does not know about this payment until the supplier actually deposits the cheque and their bank talks to yours. This delay creates a gap between your internal records and your official bank statement.
This gap matters because your bank statement will show more money than you actually have available to spend. If you look only at your bank balance and forget about the cheques you have already sent out, you risk accidentally spending money that is already spoken for.
This mistake can lead to bounced payments, unhappy suppliers, and expensive bank overdraft fees. To manage this, businesses perform a monthly bank reconciliation.
You compare your internal ledger against the bank statement to list all outstanding cheques. This process ensures your financial reports reflect your true financial position rather than just the bank's current snapshot, giving you a clear picture of your actual available cash.
Understanding outstanding cheques also helps you spot potential fraud or lost payments. If a cheque remains outstanding for many months, it might mean the recipient lost it, or perhaps it was never actually delivered.
Keeping an eye on these items allows you to follow up with vendors, cancel stale cheques, and keep your accounts tidy and reliable.
In practice
Real-world examples.
Example
You write a $1,500 rent cheque for your shop on the 28th and log it. The landlord banks it on the 3rd of next month. For those few days, it is an outstanding check.
Example
Your SME mails a $5,000 equipment payment to a supplier on Friday. Your ledger drops immediately, but the supplier receives and deposits it the following Tuesday.
Example
A boutique agency sends a $450 bonus cheque to a remote freelancer. Because the freelancer travels, they wait three weeks before taking the cheque to their local branch.
Think of it
“Imagine you mail a birthday card with a $20 note inside to your friend. You write in your personal diary that you now have $20 less. However, your wallet still has that note until your friend actually receives the letter and spends it.
Formula
Calculation
Adjusted Bank Balance = Bank Statement Balance + Deposits in Transit - Outstanding Checks
Example:
Bank Statement Balance: $10,000
Deposits in Transit: $1,200
Outstanding Checks: $3,000
Adjusted Balance = $10,000 + $1,200 - $3,000 = $8,200.
This matches your internal ledger.Case study
Seen in the real world.
GreenLeaf Landscaping, a growing regional gardening firm, ran into a cash flow scare last autumn. The owner, Sarah, checked her online business bank account on a Thursday and saw a reassuring balance of $24,000. Assuming business was booming, she authorised a $6,000 deposit on new commercial lawnmowers. However, she forgot about two large supplier cheques she had posted the previous week totalling $8,500, which had not yet cleared.
When those two cheques cleared on Monday morning, alongside a routine payroll deduction, Sarah's account dipped into a temporary overdraft, triggering a $50 bank penalty and an automated payment failure notice to one of her key fuel vendors.
Stressed by the mishap, Sarah implemented a strict monthly bank reconciliation routine with her accountant. They started tracking all outstanding cheques religiously. By acknowledging the timing gap between writing a cheque and the bank processing it, GreenLeaf Landscaping avoided any future overdraft surprises, maintaining smooth supplier relations and accurate cash visibility.
Watch out
Common mistakes.
- Subtracting the cheque amount twice, once when writing it and again when it finally clears the bank.
- Forgetting to include outstanding checks during your monthly bank reconciliation, leading to overdrawn accounts.
- Assuming that a cheque has cleared just because a few days have passed since you handed it to the supplier.
Questions
People also ask.
How long can a cheque remain outstanding?
Most business cheques are valid for six months, after which banks can refuse to cash them, though stale-dating rules can vary.
Are outstanding cheques an asset or a liability?
Neither directly on their own. They simply represent a timing difference that reduces your cash balance once processed.
What should I do if a cheque is outstanding for months?
Contact the payee to check if they received it, and consider cancelling and reissuing the payment if it is lost.
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