No one likes the thought of getting old. In our culture obsessed with youth and outward appearances, the wisdom and grace that typically accompany the aging process often get lost in the wringing of hands about facial wrinkles and decreased mobility.
When it comes to the business world, aging loses a little bit of its bitter bite. An “older” business typically means that the challenges and risks of being a baby business are in the past, and provided you’re keeping up with marketing and using KPI goal tracking to keep up with the trends, you can expect to enjoy sustained revenue for an undetermined amount of time.
There is one aspect of “getting old” in business that we caution you to avoid, however. This is a process called “receivables aging.” If this is happening to you on a consistent basis, you may quickly find yourself falling into cash flow problems that lead to a lack of working capital, no matter how old your business may be.
The Commercial Finance Group in Los Angeles is dedicated to preventing small to mid-sized businesses from falling into the vicious cycle of receivables aging. That’s why we provide receivables financing and other lending solutions custom designed for B2B and B2C enterprises. Keep reading to learn more about the dangers of receivables aging, as well as the processes that can help you keep tabs on it. If receivables aging is getting the better of your business, contact us to discuss short-term financing options today.
What Is The Meaning Of “Receivables Aging”?
On the off chance that you’ve never heard of receivables aging before, let’s define it before delving too far into our discussion of management strategies.
As you probably know, accounts receivable are created when a company provides goods or services on credit. For example, a company may allow its customers to pay for goods or services 30 days after they are delivered. This is most common in the B2B commerce industries, though it can happen in certain B2C industries as well.
“Accounts Receivable Aging (sometimes called an accounts receivable reconciliation) is a process of categorizing all the amounts owed by all customers, including the length of time the amounts have been outstanding (how old they are, thus ‘aging’),” explains The Balance.
Preparing And Using An Accounts Receivable Aging Report
This categorization process is typically carried out through the preparation of an accounts receivable aging report. The purpose of this report, among other things, is to help the business owner or financial manager to determine which receivables need to be dealt with more urgently because they’ve been unpaid longer. The Accounts Receivable Aging Report is a standard report provided with all business accounting software programs, including online systems, so no matter what tools you may be using, it’s likely that you have the ability to prepare this report without much extra effort on your part. Failure to do so could mean that overdue accounts are allowed to get out of hand, sapping away the working capital that you desperately need to run and grow your company.
Steps For Preparing An Accounts Receivable Aging Report
Evaluate The Amounts Owed By All Customers
No matter which tool you employ (or if you prefer to do things in a spreadsheet, old school style), you should begin by looking at the largest amounts of money owed by all customers. Using the 80/20 accounting principle, it makes sense to focus your collections efforts on the unpaid invoices with the largest amounts owed, because they will typically bring you the highest return if successful.
Narrow Your Focus To The Oldest Unpaid Invoices
Now that you’ve identified the biggest unpaid bills in your accounts receivable department, it’s time to further narrow your search for the oldest of these. By that we mean the bills that have been due for the longest period of time. These are the clients who are taking advantage of your willingness to extend credit, and they need to be dealt with first.
Determine Whether The Bill Is Payable Or Not
Once you’ve identified these unpaid offenders, it’s time to ask yourself some very important questions. Do you think you can actually recover this unpaid amount on your own? Do you need to escalate the collections process, either by turning the account over to a collections agency or taking the customer to small claims court? Has the individual or company on the other end of the invoice fallen on hard times or even closed up shop? If so, the bill might be unpayable and may have to be written off as a loss.
Utilize A Collections System
If you determine that your aging accounts can indeed be paid, it’s time to think about how you’re going to go about contacting them. Typically, it’s easier for slow-paying clients to say no to you or your accounts receivable manager than it would be for them to avoid a third-party collections agency who will take a more objective view of their excuses. Although the agency will doubtless take a cut of any payments recovered, it’s often a more desirable option than not getting paid at all.
“You might also want to calculate a business analysis ratio called “average collection period.” This calculation show the number of days, on average, it takes to collect on your business sales. Over time, you can see if this ratio goes up (taking a longer time to collect),” explains The Balance. This can be a good way to determine if enlisting a collections agency will be worth its cost over time.
The Option Many People Forget: Receivables Financing!
For many small to medium-sized businesses, this is the end of preparing an accounts receivable aging report, but we’d like to add one more step: accounts receivable financing.
Turning your unpaid invoices over to a collections agency is an unsure process. You may or may not ever see any returns on that investment. However, when you choose receivables financing, you get paid for your unpaid invoices immediately. This gives you the working capital you need while still allowing someone else (the financing company) to take on the process of recovering the unpaid amounts.
Eliminate Aging Accounts Receivable With Financing From CFG
Are aging accounts constantly a problem at your business? Do you feel completely overwhelmed by the idea of handling collections in-house? Accounts receivable financing could be the short-term solution you’ve been searching for. In most cases, receivables financing puts money in your pocket much faster than a commercial loan, while having no impact on your debts for the balance sheet.
If you’re desperate to recoup some of the money that’s tied up in your unpaid accounts, apply with The Commercial Finance Group in Los Angeles today.
