The start of 2021 has been largely comprised of adequate business planning and securing cash flow reserves in hopes of getting businesses in better financial health. When we think of cash flow planning, aging reports come to mind as a critical tracking component. Such reports can help businesses understand where their buyers are in terms of repayment. It can also uncover payor trends, which is extremely helpful when comes to controller forecasting. What’s most impactful is that the AR aging report allows businesses to keep their finger permanently on the pulse of their cash inflow and outflow. Assessing which clients aren’t paying in a timely fashion can alert you to underlying issues. Late payments can signal a client’s financial instability, dissatisfaction with products or services, problematic (or erroneous) invoicing, a relationship disconnect, or other serious problem. Unlike turnover ratios which simply state averages, aging reports offer much more in-depth perspective. Finance teams should consider ensuring aging reports are part of their new year planning in order to best handle credit risk, bad debt allowance, manage their inventory better, and help identify gaps in existing collection processes.
What does an aging report entail?
To go further in depth, a comprehensive aging report uncovers all the open receivables for a company at either a high level (by customer) or detailed level (by invoice) and the duration for which the balances have been outstanding. It allows businesses to identify which invoices have not been paid and gives transparency into which clients might be slow paying. Most businesses sell goods or services on credit with an agreed payment date, this balance is called Accounts Receivable. The aging report sorts all the accounts receivable outstanding balances into what we call “Aging Buckets” based on the invoice date and the due date. These buckets are typically “Current”, “1-30 days past due”, “31-60 days past due”, “61-90 days past due” and “Over 90”. As an example: for a company using standard Net 30 payment terms, an invoice issued on 12/01/20 would be current until 12/31/20, when it would move into the 1-30 days past due bucket.
What business insights can you glean from an aging report?
While we’ve introduced the concept of aging reports before, we wanted to reiterate their importance and uses so you can appropriately plan ahead. There are many different uses for the aging report. Businesses and, specifically the collections department, typically use it to determine which balances need to be focused on for collection efforts in order to secure payment for the goods or services rendered. It can also help shape credit policy, if a business has a large balance that is aged, it might be time to review the credit granting process and tighten restrictions on who can get credit. Similarly, it can be used to identify individual customers who are late payors and may need more aggressive collection efforts or even a suspension of their credit line or provided services. The aging report gives insight into the future cash flow for a company, balances that are current are deemed collectible and therefore a reliable forecast of future revenues, whereas older balances become more concerning. Businesses use the aging report to determine how much of the balance can be considered at risk, this can be due to the age of the invoice, previous customer behavior, economic climate or geographical location of the customer. Most businesses use this estimation of high risk dollars to book a “Bad Debt Reserve”, which is an adjusting accounting entry that removes the high risk balance from the P&L as an asset and logs it as a liability.
The economic impact of using aging reports
Without an aging report, it is difficult for businesses to maintain a healthy flow of cash or identify potentially risky clients. The aging report is the roadmap which collections teams follow in order to contact customers regarding outstanding balances in a meaningful and systematic way. Teams can evaluate payment terms, credit lines and profitability from the report. Businesses can also use it to determine how effective their collections strategy is: do they need to be more aggressive with collections efforts? Do they need more collectors to follow up with clients regarding outstanding balances? Can they automate more of the process in order to be more efficient?
The process of securing payment is always easier when the aging is used a source document to drive an automated collections process. This means the aging drives preset actions such as dunning emails to clients at specified intervals based on the due date of an invoice. Ideally an automated approach would also determine the methodology in which collections teams pursue debts. The aging can drive actions for the collection’s teams based on specific criteria as determined by the business process.
By leveraging an automated platform, such as Yaypay, businesses gain insight and visibility into your aging and your at-risk receivables. By having that understanding businesses can better predict accurate cash flow, payment predictability and customer trends. In a customer testimonial from Chris Pearce, International Finance Director for Cheetah Digital, a global digital marketing company, he said that “With the help of YayPay’s automated AR platform, we have seen our global DSO reduce by over 25 days. On average our clients now pay within 10 to 15 days of their due date.”
Cheetah Digital has also seen a significant decrease in their past due receivables which Chris attributes to enhanced visibility across all of the global teams. “An important benefit of the automated workflows is that they can communicate the current position both internally as well as externally. We now have all of our Sales teams fully informed on the state of their client’s ledger, meaning they can assist in the collection process by speaking directly to the client. Gaining access to online statements also ensures they have the latest information whenever they want”.
On average, YayPay customers see a 34% reduction in DSO by getting paid faster, improved team efficiency due to greater visibility and organization of their workloads and gain up to 94% accuracy in forecasting by using the tools built in strategic insight.