Business owners everywhere face the issue of clients who delay payments. To some extent that is part of doing business, especially as a small company in a developing country like Rwanda. However, there is a simple tool that managers can use to know who their best and worst clients are, allowing them to avoid the biggest payment headaches and ensuring that they can keep operating. This tool is the Invoice Ageing Report.
Keeping track of who has your money
The invoice ageing report breaks down who has your money, how long they have been sitting on it and when they were supposed to pay. It is a simple list of all invoices and their due date, which can be grouped into categories of how many days past due the invoices are. It allows you as a manager to know who to chase, who still has time and who you should worry about. The sum total on your invoice ageing report also shows you how much money you are owed, giving you a snapshot of the overall financial health of your company. This number is important to keep track of over time, and reducing it should be any manager’s priority.
In the above example, Gem Merchandise has $130,820 in pending payments. Depending on their size this may mean that they are starting to feel the pressure and the manager have asked their accountant to prepare the invoice ageing report. Upon inspection, the manager may realise that they are owed a lot of money from four clients, but that only two of them have delayed significantly – namely Extreme Co and Trifect LLC. Thus, the manager knows where to focus their collection efforts, and can also tell their sales people to stop selling goods on credit to those two companies until they have cleared their balances. Conversely, she may also tell the sales team to go to ABC Co and Main Corp and see if they can buy more from Gem Merchandise – both are relatively good payers and she can see that selling to them is lower risk. She also knows that she might have to budget for some bad debt if Extreme Co never pays their invoice now that they have delayed over two months already. All these insights help her stabilise her company and reduces the risk of running into serious cash flow problems down the line.
- Are you facing problems finding who is worth being credited? Consult your report
- Are you concerned by your lack of capital? Consult your report to see who is holding on to your money
- Are you in a critical position with your investors or creditors asking where their money could be? Show them the report
- Trying to figure out why your clients haven’t paid? Call them, a report won’t help :)
Knowing when to limit credit sales by tracking customer behaviour over time
Another useful insight that we can learn from the invoice ageing report is whether we should start worrying about a client who buys on credit. By tracking over time how long a client takes to pay normally, we can get early warning signs as to whether there may be some trouble brewing – e.g. a client that normally took 5 days to pay but all of a sudden starts to delay payments may be going through financial difficulty or their management has lost focus. This is a good time to limit how much you sell to them on credit to not risk having to write off an invoice entirely in case they go bankrupt. Similarly, a client who used to be slow but starts paying faster may have made some good changes or hired a better accountant which means that it is safer to sell more to them on credit.
In the example above, XYZ Group used to take 5 days to pay, but mid-October they started delaying while simultaneously increasing their order sizes. There may be valid reasons for this change in behaviour, but as a manager you will want to notice such behaviour to know when to stop selling to XYZ Group. The invoice ageing report gives you a clear picture of how your clients are paying, allowing you to spot early signs of trouble.
Using the invoice ageing report to access factoring services
As explained in the how-it-works section on this website, factoring is a financial service whereby cash is advanced against pending invoices. To determine who to work with, we use the invoice ageing report to learn a number of things:
- Who have you sold to on credit in the past and how did they pay?
- How long have you been working with the client whose invoice you want us to buy? How stable is your relationship with them?
- Did any of your clients change behaviour recently and what actions did you take to reduce your risk?
- How good are you at selecting reliable clients, compared to your sector average?
All of these points tell us a lot about your company and how good the management is - which is ultimately what we look for. Being able to show stability and predictability always makes a financial institution happy, and we are no exception. We therefore ask all our clients to fill out an invoice ageing report and provide evidence from bank statements. Download our free template report here and see what insights you can learn today.
Got any questions? Use the comment section below or get it touch. We'll be happy to hear from you.