Outstanding invoices: What they are and how your small business manages them

Published Monday 24 November 2025

Table of contents

• What are outstanding invoices?
• What's the difference between outstanding and past due invoices?
• How do unpaid invoices affect your business?
• How to chase late payments
• Tips for avoiding late payments
• When you still don't receive payment
• Download Xero's free invoice template
• Take control of your outstanding invoices with Xero
• FAQs on outstanding invoices

Key takeaways

• Implement a systematic payment request process starting with polite email reminders, then escalating through overdue notices, phone calls, and late fees to maximize collection success rates.

• Establish clear payment terms upfront including late fees, request partial payments or deposits before starting work, and offer payment plans to prevent cash flow disruptions.

• Utilize accounting software to automate invoice tracking and payment reminders, enabling you to spot overdue payments early and maintain consistent follow-up without manual effort.

• Recognize the difference between outstanding invoices (all unpaid bills regardless of due date) and past due invoices (payments that have exceeded their deadline and require immediate action).

What are outstanding invoices?

An outstanding invoice is one that you've sent to a customer, but you haven't received payment for yet. It's a normal part of the billing cycle and simply means the payment is pending.

'Outstanding' doesn't automatically mean 'overdue'. An invoice is only considered overdue or past due after it has passed its payment deadline.

What's the difference between outstanding and past due invoices?

Outstanding invoices include all unpaid bills, regardless of whether they're still within the payment period or overdue.

Past due invoices are outstanding invoices that have exceeded their payment deadline and require immediate collection action.

Key difference:

• Outstanding: May still be within payment terms
• Past due: Payment deadline has passed, urgent action needed

How do unpaid invoices affect your business?

Outstanding invoices can make it harder to manage your cash flow and plan for the future, with late payments from large businesses moving A$7 billion in working capital away from small businesses each year. When payments arrive consistently late, your business faces immediate challenges:

• Cash flow disruption: Difficulty covering essential operating costs
• Financial planning obstacles: Inability to predict available funds
• Operational strain: Risk to supplier relationships and credit rating

For example, unpaid invoices can affect your relationships with suppliers if you cannot pay them on time. This may also impact your credit rating and make it harder to secure future work.

Successfully invoicing and managing unpaid invoices is crucial to sustain your business's long-term financial health.

How to chase late payments

Follow these steps to learn how to chase late payments.

1. Write a payment request letter or email

Payment request letters resolve most overdue invoices through professional, documented communication. This first step prompts immediate payment in most cases and establishes a paper trail for escalation if needed.

Why payment request letters work:

• Quick resolution: Most customers pay after a polite reminder
• Professional approach: Maintains business relationships
• Documentation: Creates evidence for future collection efforts

How to structure your payment request letter

Your payment request letter should be a brief reminder of the outstanding invoice, and communicated in a professional tone. Start with a usual greeting and then remind them of the unpaid invoice, including the specific invoice number, due date, and amount owed. Politely ask when you can expect payment and offer a brief reminder of your payment terms.

You don't need to stipulate what the payment was for – those details should already be on the original invoice.

2. Send an overdue invoice

Overdue invoices create urgency by marking unpaid bills with clear "overdue" stamps or notifications. This escalation step increases payment pressure while maintaining professional communication.

How overdue invoices work:

• Visual urgency: Clear "overdue" marking on original invoice
• Formal reminder: Attached to follow-up email communication
• Escalation signal: Shows progression from polite request to firm demand

Add an invoice reminder schedule to your accounting routine so you can promptly follow up on late payments and keep customers aware of their outstanding invoices. You can do this manually or use automated invoicing software to send payment reminders until you receive payment.

3. Send a statement of accounts

Statements of accounts consolidate multiple unpaid invoices into one comprehensive document, streamlining your collection process for clients with several outstanding bills.

Key benefits:

• Administrative efficiency: Chase multiple invoices simultaneously
• Complete overview: Client sees total amount owed across all invoices
• Professional presentation: Organised summary demonstrates systematic approach

Call the client to check they have received and understand the statement.

4. Make the phone call and prepare to negotiate

Phone calls achieve the highest success rates for collecting outstanding invoices because direct conversation prevents avoidance and enables immediate negotiation.

Structured call approach:

1. Identify the debt: Reference specific invoice numbers and dates
2. Request payment date: Ask directly when payment will be made
3. Wait for commitment: Use silence to encourage a specific date
4. Confirm agreement: Don't end without a payment commitment

You may need to negotiate the terms of when you'll receive payment. For instance, if the unpaid invoice is a relatively small amount which they can pay soon, you may agree to move the payment date but refuse to carry out any more work until payment is made.

Find a payment negotiation strategy that works for your situation. If you do not want to negotiate overdue invoices on the phone, ask your bookkeeper or accountant to handle it for you.

5. Charge a late payment fee

Late payment fees incentivise on-time payments and must be clearly stated in your initial payment terms before work begins. Transparent fee policies protect your cash flow while maintaining client relationships.

Effective fee structure:

• Simple calculation: Single fee rather than percentage for clarity
• Clear communication: Include in all initial agreements
• Goodwill option: Consider waiving fees for quick payment after notice

Some businesses use a percentage of the original amount as a late fee, but it is simpler for your customer if you set a single fee. For example:

• Total due by 1 June: $100
• Total due after 1 June: $110

Keeping it simple can motivate customers to pay on time. If they do not pay on time, let them know you have added the late fee. As a goodwill gesture, you can offer to waive the late fee if the customer pays quickly, for example, within 48 hours.

6. Cut them off until outstanding invoices are paid

If a customer is not paying or responding, pause work until you receive payment. This helps protect your business.

Let the client know you will resume work once all outstanding invoices are paid. This helps you protect your business.

7. Hire a debt collector

If you are struggling with unpaid invoices, a debt collection service can help you recover payment when a customer is unresponsive. This is a common final step after you have tried other collection methods.

Debt collection fees usually range from 5% to 25%. Under UK law, you can pass these costs on to the debtor, so the service may not cost you anything.

You can find approved debt collection service providers directly through the Xero App Store.

8. Call in the lawyers

If a debt collector cannot resolve your outstanding invoices, consult a lawyer. The type of legal action depends on whether the debtor is a sole trader, partnership or company. You can also consider taking the client to a small claims court to recover unpaid invoices.

Legal action can be complex, so consult a specialist lawyer with experience in collecting unpaid invoices. Your debt collector may have in-house legal expertise or can refer you to a lawyer.

To find out more about legal action, check the disputes register in Australia.

Tips for avoiding late payments

Use prevention strategies to save time and protect your cash flow. Taking proactive steps is more effective and less stressful than chasing overdue invoices.

Set time aside to track outstanding invoices

Spot outstanding invoices early and send prompt reminders to get paid faster and keep your cash flow healthy.

Take partial payment upfront

Ask for a partial payment upfront, such as a deposit or a percentage of the total fee. This helps cover your costs and shows if a client is willing to pay. It also improves your cash flow because you are not waiting for the full payment later.

Offer payment plans to clients

Offer a payment plan so clients can pay in instalments. For example, you might ask for 25% upfront, 25% halfway through, and 50% on completion. If a client has cash flow issues, break the payment into smaller amounts over several months.

This approach works well for large invoices or long-term projects. Payment plans can help you and your client manage cash flow and make sure you get paid before invoices become overdue.

Use accounting software like Xero

Use Xero to automate sending invoices and reminders. This saves you time and helps prevent late payments.

When you still don't receive payment

If you still do not receive payment after trying these steps, here is what you can do:

Write off the unpaid invoice

If you use the accrual method of accounting (where you report both money received and money expected), you need to write off unpaid invoices to pay the correct amount of tax. If you have already paid tax on the income you expected, you need to write off the invoice to claim the tax back. To do this, companies must meet one of the business continuity tests as defined by the Australian Taxation Office (ATO).

In order to write off an invoice, you'll need to prove to your local tax authority that the unpaid invoice was a 'bad debt'. For businesses using an accruals basis for goods and services tax (GST), the Australian Taxation Office (ATO) allows you to claim a decreasing adjustment for a bad debt if you have already paid the GST for that sale and the debt has been overdue for 12 months or more. For instance, you could use your correspondence with the unpaying client as evidence. Xero's software can help you track, manage, and write off bad debts in your accounting.

If you use the cash method of accounting (where you only count revenue once collected), you do not need to write off unpaid invoices. Just do not include the amount in your income statements.

Perform credit checks on prospective clients

Check a client's credit score before you agree to work with them. A good credit score shows they pay bills on time and are less likely to leave invoices unpaid.

Download Xero's free invoice template

Use Xero's invoice template to create and send invoices easily. Set early payment dates to get paid faster, and use Xero's live payment times to track how long your clients take to pay.

Download Xero's free invoice template.

Take control of your outstanding invoices with Xero

A clear system helps you manage your cash flow and keep good client relationships. With the right tools and strategies, you can spend less time following up and more time running your business.

Xero accounting software makes it easy to track invoices, send automated reminders, and get paid faster. See how you can streamline your finances and run your business with confidence. Try Xero for free.

FAQs on outstanding invoices

Below are answers to common questions about managing outstanding invoices.

How long should I wait before chasing an outstanding invoice?

Send a polite reminder on the day the invoice becomes overdue. You can also send a reminder a few days before the due date. Prompt and professional follow-ups show you are organised and help you get paid faster.

Can I charge interest on outstanding invoices?

You can charge interest or late fees if you include this in your original payment terms and your client agrees. Check local laws and regulations to make sure you comply.

What should I do if a client disputes an outstanding invoice?

Pause collection efforts and contact your client to understand their concern. Review the invoice and your service agreement for errors. Work with your client to find a fair solution and keep a record of all communication.

Is it legal to stop work for outstanding invoices?

If your contract allows, pause or stop work if a client has not paid. Tell your client in writing that you are pausing work until they pay the outstanding invoice. This protects your business and encourages payment.

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

Published Sunday 25 August 2025