In order to structure a workable operating budget for your company, it is necessary to periodically generate an accounts receivable aging report. What is an accounts receivable aging report?
An accounts receivable aging report, simply put, shows the total balances owed by clients and the duration for which their invoices have been outstanding, broken down into categories, such as 30-60 days, 60 to 90 days, 90-120 days, etc.
This critical report allows you to identify invoices that are still open and carefully analyze the financial reliability of your customers. If one company is consistently late paying invoices, it could be a red flag that there are other underlying issues: For example they may not be succeeding in meeting their business goals or they may not be satisfied with products or services, or any other number of issues. This could make them a potentially bad credit risk and therefore a bad account to work with.
To successfully meet monthly operating costs you need a steady revenue stream, and an accounts receivable aging report will show which companies are making regular, on-time payments. Without this information, it will be difficult to maintain a healthy cash flow if you are always worried about late payment on outstanding invoices.
Accounts receivable aging reports provide the following benefits:
- Regular contact with customers so they know late payment is not acceptable and that you are on top of your billing and collection process.
- The ability to decide to sever ties with those customers who struggle to pay their invoices on time, which in turn inhibits your success.
- Instead of having to regularly write off bad debts, you can make the determination to stop providing goods or services before late payment becomes an issue.
- You can identify internal vs. external issues with your company's accounts receivable process.
- The ability to evaluate payment terms with suppliers and make any necessary changes and negotiate different terms.
Make sure to include the following in your report for each customer:
- Customer information and statements.
- Status of collection.
- Total amount outstanding.
- Activity and financial history.
If you notice that you have customers that frequently pay late and it's disrupting your cash flow, but you aren't quite ready to terminate your relationships with those customers, it may be a good time to consider invoice factoring as a highly beneficial and efficient cash flow management tool.
Should you decide to factor your invoices as a way to regulate lengthy payment intervals, one of the documents your invoice factoring company will require is an accounts receivable aging report. It is used to help determine the factoring rate. Through this report the factor is able to see how many customers you have, and how much you are owed. If it becomes apparent that customers are continually late payers, the likelihood is that your rate will be higher. This is because the factoring company is effectively advancing you money on your outstanding invoices. The later the payments are received from your customers, the larger the risk.
This will not be the only document used to determine your rate. Once the factor has a good idea of which customers could be a financial challenge it will combine this information with a credit report on those companies whose accounts you would like to factor. The joint information will be used to decide your rate. Since your factor becomes your collections department it helps with erratic payment cycles as well.
For more than three decades, Bay View Funding has helped many businesses manage operating costs and grow by improving cash flow with accounts receivable financing. We have the expertise and customer service to help you eliminate a cash crunch.