Last updated: 15th March 2023
What your aged debtors report tells you about late payers
Is dealing with late payments a constant theme in your business? Do clients frequently take longer than their agreed terms to settle an invoice?
Does all of this leave you with the headache of worrying if you are going to have enough cash for payroll at the end of the month?
In this series of blogs, we’ll examine the key financial reports you need to successfully manage your business. Following last week’s exploration of the bank reconciliation report, this blog explains precisely why you need to know who owes you money. It also shows you how to find out exactly what is owed, and the warning flags to look out for . You’ll also find practical tips to overcome problems so that you can enjoy bringing in the money!
What is an aged debtors report and why is it important?
The aged debtors report provides you with an overview of clients you have billed and shows the amounts that are outstanding. It’s usually broken down into columns which denote time periods. For example, ‘current’, ‘30 days’, ‘60 days’, and ‘greater than 60 days.’
In essence your aged debtor report gives an at-a-glance view of money owed to the business. Money that is sitting in someone else’s bank account when it should be in yours! If you are like almost all other business owners, you generally prefer your money to be in your own bank account, so this is important.
Quite simply, it pays to review your aged debtors report regularly so you’re aware of where the business is financially. You also know where your money is and if there are any problems on the horizon.
How to spot warning flags on your aged debtor report
There are two major things to look out for in your aged debtor report: debt over agreed terms and negative balances.
For example, if your agreed terms state that invoices should be paid 30 days from the date of the invoice then anything older than this is a warning sign. Payments that are very late are particularly concerning; if your invoice is past 60 days, this is a definite red flag. The longer an invoice is unpaid, the more interest you are losing out on and the greater the chance of it becoming a bad debt.
Keep a watch on negative balances also. Confusingly, depending on your accounting software, a negative balance may appear on the report as:
- A figure with a minus before: -£1,000
- A figure inside brackets: (£1,000)
However they appear, there should be very few negative balances on your aged debtors report. A negative balance could mean that the client has paid before you have raised an invoice. It could also mean your finance team has issued a credit note which has not been matched to the invoice, or it could mean that your business owes money to the customer.
What to do if you notice problems
With debts greater than agreed terms, ask your finance team to check if payment has been received. If not, chase the invoice immediately. Prioritise the oldest invoices first as these are the biggest concern – begin with outstanding amounts greater than 60 days and work back in date.
Take some time to review your aged debtors reports to spot patterns. For example, are there clients who habitually pay late? If yes, find a way to build relationships and encourage them to pay on time and deploy credit control if necessary.
If there are a lot of negative balances in your aged debtors report, it could be a sign there is an issue with organisation. Speak with your team – are they struggling to keep on top of things? Consider if additional help is needed.
Don’t ignore your aged debtors report
Your aged debtors report is a crucial tool to understand the financial health of your business; review it frequently. Late payments are a real problem for smaller businesses. Estimates vary, though figures published by Tide before the pandemic suggest that small businesses chase £8,500 worth of unpaid invoices at any given time. This isn’t just time-consuming, it jeopardises those businesses’ stability long term – and the additional risk such debt places on your business really isn’t worth taking.
Even if late payments are not an issue for your business, a finance team that is in control is essential.
Our guide, Why your business isn’t as profitable as you think, contains practical information to help you get the best from your finance team. Download the guide for a thorough and yet straightforward overview of the aged debtors report, as well as five other critical financial reports you need to understand and keep an eye on.
Need help with your finance team or want to find out how a Fractional Finance Director could help reduce your late payments? Call us on 020 8191 2124.
Photo by Aaina Sharma on Unsplash
