Wondering what your aging accounts receivable report can reveal? Uncover five pivotal insights to gain a deeper understanding of your financial landscape.
Before we dive into how you can use your aging AR report, let’s establish what it is and what it can tell you about your company.
An aging accounts receivable report is a business report that shows customer payment status against current invoices. As a management tool, it’ll tell you when specific customers become credit risks and if your company should continue the relationship.
The typical AR report has columns broken into 30-day segments. It shows which invoices are due and then arranges them by tardiness for each 30-day period. The more customers you have in the 60- to 90-day bucket, the worse shape you’re in. The likelihood of collecting on those outstanding accounts is reduced significantly. At this stage, cutting ties and/or writing off the loss is often better than continuing the relationship.
Your company’s aging AR report also helps you determine which customers you’ll extend credit to and which ones you’ll keep on a cash-only basis. Challenging customers will be required to do business in cash, while those with a track record of on-time payments can purchase from you on credit.
What Your Aging Accounts Receivable Report Says About Your Business
Your aging accounts receivable report tells you more about your business than who’s paying on time.
Let’s unpack five critical insights you can glean from your business’s aging accounts receivable report to improve decision-making company wide.
Cash Flow Status
Cash flow is a critical aspect of any organization. Basically, it’s the amount of money coming in and out of your company. But don’t confuse it with profits and revenue. Cash flow mostly concerns your business’s ability to meet its financial obligations.
Tracking invoices is an excellent way to estimate how much cash will come in during a 30-day period. But that figure isn’t set in stone, which is where your aging AR report comes into play. The AR report tells you which customers are most and least likely to pay on time. This gives you a more accurate forecast of how much cash you’ll have.
If you’re having cash flow problems, too many overdue invoices may be to blame. It could also be an issue of collections on your end. Timing delivery of invoices to your customers is essential to avoid potential cash flow gaps thus automated system could help keep your accounts receivable in order. It takes the monotony out of sending invoices, especially when managing repeat clients.
Credit is also a major factor in cash flow and aging AR. If you’re extending too much credit to customers, you may not have enough collateral to back your credit lines. Poor cash flow and aging AR reports might impact your ability to qualify for financing from a lender.
Customer Credit Risk and Collectability
Your aging accounts receivable report helps evaluate the creditworthiness of your customers. You might also want to perform a credit risk analysis on prospective business partners before offering anything on credit.
A credit risk analysis will tell you whether a borrower will be able to repay the loan. You may want to consider looking at their financial history, income statement, credit score, and other factors before accurately assessing their creditworthiness.
Being proactive helps minimize bad debts, reduce days sales outstanding (DSO), mitigate financial risk, and improve the customer experience. Your aging AR report will provide insights into your customer’s past behavior regarding invoice payments. It can also help you determine who’s more prone to late payments or even default.
Grouping customers is one effective way to determine which are high-risk. The more segmented they are, the easier it is to identify high-risk customer profiles. Consider categorizing them by:
- Geography
- Size
- Industry
- Percentage of receivables represented by that customer
- Payment guarantees (assurances that the payment price will be paid on a specific day)
This kind of segmentation can offer useful insight into future business decisions. After grouping your customers, let’s say you notice that a high percentage of late-payers come from the same industry. A handful of questions may be considered: Is there something about that industry that’s making them pay late? Are there delays? Bottlenecks? If you must do business with them, can you adjust your models to account for these expected delays?
Evaluation of an Invoicing Process
After analyzing your aging accounts receivable report, you may also find that cash flow problems are due to issues on your end. For instance, the aging AR report may lead you to consider additional follow up on past due invoices, sending reminders, applying late fees, and legal action.
The importance of automated invoice management tools can’t be overlooked. These tools take the tedium and time constraints out of sending manual invoices. In fact, according to a LinkedIn poll, respondents believed that invoicing automation is among the top business trends for 2023.
Automating these processes may be one of the quickest ways to bolster your cash flow management. Accurate and timely invoicing can ensure that your company receives payments quickly. After all, clients can’t pay an invoice they haven’t received. Inaccurate invoices also lead to bottlenecks, as clients won’t pay invoices with mistakes.
Accuracy lets you keep precise records of your revenue, so you can make more accurate forecasts regarding future cash flow. A new investment might suddenly appear less risky based on your cash flow projections, for example. You can see how errors can paint an inaccurate picture, leading to missed opportunities and dire consequences.
Estimation of Bad Debt
If you sell on credit, bad debt is among your worst enemies. It can harm profitability and cash flow while damaging your reputation. Your aging accounts receivable report can help you determine which customers are teetering on the edge of becoming bad debt.
The longer a receivable is outstanding, the higher the risk of that company defaulting on the payment. Once it defaults, you have one of two options: pursue costly (and time-consuming) legal action or write it off as bad debt.
Proper due diligence can aid in mitigation and prevention of these issues in the first place. That involves performing credit analysis on all new partners and establishing terms before making any transactions.
Once a client agrees to your due dates, credit limit, interest rates, and late fees, it becomes easier to enforce those terms. You can also review and adjust them based on the customer’s behavior. If they always pay on time (or early), you may consider raising their limit or relaxing late fees.
You’ll inevitably encounter bad debts and defaults. How you manage them is critical to making a swift recovery. Writing off bad debt means acknowledging it as a loss on your income statement. Once you’ve readjusted projections, you can take steps to recover some or all of that bad debt, either on your own or through a third-party collector.
It’s generally a good idea to remove the bad debt from your income statements first before trying to collect. There’s no way of knowing how much you’ll recover or how long it will take.
Billing Timeliness
Finally, your aging AR report helps identify issues in your accounts receivable department. From there, you can take the necessary steps to remedy those problems, whether it’s getting customers to pay on time or preventing future cash flow hurdles.
Set strict policies on when to send reminders regarding unpaid invoices. Your accounts receivable team should have a playbook to follow when working with late-paying customers.
Timely payments are everything in cash flow management. Again, customers can’t pay invoices they haven’t received yet. So, if you still rely on manual processes, consider moving toward digital solutions.
Electronic invoices can be sent instantly via email. They can also be paid immediately if you offer online payment options. In most cases, it is faster and easier to pay your bills online rather than sending checks in the mail. Also checks are typically more susceptible to theft and fraud.
Your Aging Accounts Receivable Report Is a Powerful Tool
Don’t neglect your aging accounts receivable report; you could miss many valuable insights. Your accounts receivable report is the first place you should look if you’re experiencing cash flow issues, as it’ll tell you which customers are timely payers and which ones aren’t.
Automation is key when it comes to AR and cash flow management. There are plenty of digital invoicing tools you can use to get your AR back on track. You can also lean on a trusted financial partner like Illinois Bank & Trust, a division of HTLF Bank to navigate business trends and make more informed decisions regarding AR management and digital invoicing tools.
Get in touch with Illinois Bank & Trust, a division of HTLF Bank today to speak with one of our commercial bankers and get your AR automated and back on track. Together, you can unpack your aging accounts receivable report and determine the best next steps for your business.
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