How To Use The Account Receivables Aging Report to Run Your Agency
The Accounts Receivable Aging Report allows you to see "who" owes you money, and "how long" those invoices have been outstanding. It is one of the most important reports for you to consult regularly as it provide insights into your agency cash flow and customer risk. Let me explain how it works:
There are three ways to finance your agency from an accounting standpoint. You can:
A) raise capital from investors
B) raise debt from creditors / banks
C) collect receivables from customers
The Accounts Receivable Aging Report helps with option (c) collecting from customers. Most agencies send invoices on a monthly or project based to customers, who in turn pay those invoices within a certain time period (i.e. Net30 or Net60). Rarely does an agency collect upon receipt, especially if it’s working with bigger clients who need and require terms.
At any given time, an agency may have thousands of dollars outstanding, spread out over several customers. The Accounts Receivable Aging report helps you monitor who owes you and how long those invoices have been outstanding. Consulting this report allows you to proactively:
Follow up with customers with outstanding invoices beyond the agreed upon terms. The Best Practice here is to reach out immediately so that your invoices get paid quicker. Don’t worry about being annoying. You are due those funds. The squeaky wheel always gets the oil.
Incentivize customers to pay early with discounts. You can use the 2/10 Net 30 term. This means that customers get a 2% discount if they pay with 10 days, or they pay the full amount within 30 days. Almost every sophisticated business would take you up on that offer.
You can use the accounting Receivable Aging report to facilitate collections and improve cash flow, and also to identify potential customer consideration risk.
As a general rule, service based businesses, like marketing agencies and professional service firms, should be cautious if a single client accounts for more than 15% of overall revenue. When a single client accounts for such a large percentage of sales, they could cause significant business disruption should they decide to cut ties, extend payment terms, or pay your invoices later than you expect.