All projects, regardless of size, can only succeed if you manage cash flow effectively. But to do that well takes knowledge. Specifically, you need to have a handle on how much money flows in and out of the business in any given period.
One everyday fact of business life that makes predicting cash flow tricky is overdue invoices. These invoices can throw a spanner in the works of any project, and monitoring them through accounts receivable aging reports is crucial.
But what is an accounts receivable aging report? This article aims to demystify this handy reporting technique by showing how it works and why it’s so useful in cash flow management.
What Is an Accounts Receivable Aging Report?
An accounts receivable aging report tracks and categorizes outstanding receivables by time period. It lists outstanding invoices by how long they’ve remained unpaid.
Explanation and Purpose
Experienced credit managers know how important it is to keep on top of overdue payments to guarantee a healthy cash flow. Cash flow mismanagement can bring down even the most robust of businesses, so making sure customer accounts are as up-to-date as possible is a top priority.
You must adopt a systematic method for identifying slow-paying customers to achieve that. You can then take action to collect overdue invoices by issuing reminders to customers or if needed, exercise lien rights.
According to an AP Automation Tracker report by PYMNTS and Beanworks, around 49% of invoices created by businesses in the US eventually become overdue—so it’s a big issue.
It’s crucial to distinguish between customer payments just a little behind and those with a genuine risk of turning into bad debts. The longer an invoice remains unpaid, the more likely it won’t be paid.
In an accounts receivable aging report, unpaid invoices are placed into distinct periods, usually in 30-day segments. There will be a column for invoices overdue for 0-30 days, one for those 31-60 days behind, one for invoices 61-90 days overdue, and a final one for invoices that have remained unpaid for over 90 days.
Components of the Report
The report should list all relevant information about overdue accounts, simplifying the collection process. An aging report typically includes the following:
Customer details: the customer’s name and the account number if relevant, possibly alongside contact information.
Invoice details: number of the invoice, its issue date, and the total amount due. It’s important to specify the details of the original invoice rather than any follow-up invoices so there’s no doubt about the starting period.
Aging categories: the 30-day buckets as described above.
Amounts due: breakdown of the total amount due per aging category per customer. There can sometimes be a separate column for the total overdue credit balance.
Comments: any comments relevant to the account, such as when any follow-ups were sent or any payment agreements negotiated.
One of the main advantages of charting overdue payments like this is that it dovetails well with automated financial processes. It’s worth exploring this in more detail to establish why using dedicated tools can give you an advantage over companies using a manual approach.
Manual vs. Automated Methods
Manually creating receivable aging reports is possible. You will need a spreadsheet and a watertight data entry process. That said, it’s only workable for small businesses with just a few clients to monitor.
Manual report generation can become very complex very quickly if you’re trying to keep track of many unpaid customer invoices. And there’s always the risk of human error, jeopardizing the collections process.
Instead, using simple accounts receivable software to generate aging reports is best practice. This kind of dedicated tool not only processes payments automatically but can also generate invoices and issue payment reminders, freeing up your team from having to do the laborious work of generating aging reports themselves. Automation leaves them more time to get on with more important tasks. An A/R tool that integrates well with construction credit management tools is a level up, too.
How to Read and Interpret Results
Let’s take a look at a simple receivables aging table.
As you can see, each company has an outstanding balance spread across two invoices. The amounts in the “current” column refer to invoices that have been issued but have not yet fallen due.
We can see that Company X owes $2,500, invoiced between 31 and 60 days ago, while Company Y has two outstanding debts of different ages. Company Z needs to catch up on its $2,500 payment. Luckily, no receivables are unpaid in the 91+ days category.
As time goes by, if the payments still aren’t settled, they’ll drift rightward through the aging categories until they are either collected or written off as bad debts.
Impact of Accounts Receivable Aging on Project Cash Flow
Monitoring outstanding payments is key to avoiding cash flow issues. And you learn a lot by examining a receivables aging report.
Relationship Between Accounts Receivable and Project Cash Flow
Maintaining a healthy cash flow is needed to continue to pay suppliers and employees and stay on top of any other operational expenses. The accounts receivable is a direct measure of expected future revenue, but you can’t know precisely when those invoices will be paid.
Even so, you can estimate future cash flow based on an aging report. You can assume, based on past experience of customer behaviors, that a certain proportion of them will pay eventually.
In this regard, knowing how your aged receivables report compares to your competitors can be useful. The business intelligence experts Dun & Bradstreet compile AR benchmarking statistics categorized by industry. Its Q1 2024 report said that for general contractors in the construction industry, the following receivables aging pattern is typical:
- Paying current: 60.5%
- Paying up to 30 days late: 27.8%
- Paying 31-60 days late: 6.5%
- Paying 61-90 days late: 2.6%
- Paying 91+ days late: 2.6%
Identifying Cash Flow Issues Through the Aging Report
If the pattern in your receivables aging report is significantly different from benchmarks in your sector, it may indicate an issue that needs to be addressed. For instance, suppose you find that the proportion of payments in the 31-60 days bucket is 15%. That’s considerably above average for the sector and merits further investigation.
You see how breaking down the invoices per customer is crucial. Let’s say a large proportion of your business comes from a single client who’s in the habit of paying late. If that’s the case, you must be aware of this so you can avoid any potential cash flow problems by carefully allocating your available resources to cover any shortfall.
Strategies to Manage Accounts Receivable Aging
Optimizing the payment and collections processes can have a big positive impact on your business, particularly if you’re on the supply-side of construction. So, let’s look at some of the best ways to reduce the risk of delinquent accounts hurting your bottom line.
Improve Invoice Processing and Collection
Using dedicated tools that integrate well with the solutions you use is the path to streamlining your invoice processing and boosting your collections efforts–like easy online payments. However, selecting one that’s a good fit for your area of business is vital.
A construction firm’s needs will generally differ depending on the size of the business or what side of construction you work in. For example, a materials wholesaler or supply company will likely have different needs than a real estate developer. So, take time to do your research.
Offer Early Payment Discounts
Another invoice tip is to offer customers discounts for early payment. It’s an effective incentive that works to expedite payments from clients and can be a great way of enriching your organization’s relationships with customers.
Implement Late Payment Penalties
Conversely, you can add a stick to the carrot and implement late payment penalties too. It’s the same incentive but in reverse. Most businesses will take steps to only pay what they absolutely have to. Just make sure your policy on applying payment penalties is clearly stated upfront to avoid any potential arguments developing later.
Regularly Review and Follow Up
Regularly check and update your A/R aging reports and compare them with data from the rest of your business to understand how your accounts receivable are impacting other parts of your building, manufacturing, or wholesale business.
Again, it can be helpful to employ specific software to provide you with the insights you need with reports tailored to your business.
For example, distribution software provides supply companies with the full picture by combining automated revenue recognition with order fulfillment and inventory management functions.
Ultimately, using a combined financial, accounting, and ERP software designed for your industry will allow you to create a single source of information to holistically review your processes and update your payment policies when necessary.
Key Takeaways
Cash flow problems never strike out of nowhere. If you know what to look out for, you should be able to see them coming and adjust your strategy to allow your organization to weather the storm.
Compiling accounts receivable aging reports regularly is the simplest way to keep track of overdue payments to ensure they stay in order. If you’re not already in the habit of using them, it could be time to start. You may be surprised just how much more control it gives you and, ultimately, how much it helps boost your bottom line.