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Older and wiser:

What an aging report reveals about customer relationships

It’s said that age is just a number. But when it comes to unpaid invoices, that number can be quite telling about the
state of the customer relationship. The older an invoice gets, the more attention the relationship needs.
As a tool to help manage customers, an aging report can be one of your very best resources. So what should you
know about it? And how can you use one effectively?

The aging report – what it is, does and looks like 1

An aging report organizes unpaid (or partially paid) invoices by how long they’re overdue, either by invoice
date or due date. They’re grouped into buckets, with the most common buckets being:

0-30 days old 31-60 days old 61-90 days old older than 90 days

An aging report is like having your own customer watch list. It allows you to easily identify the largest and most
delinquent past due balances. From there, you can quickly prioritize collections activities like phone calls, credit
holds, and determining whether a third-party agency is needed. (See the cheat sheets from the last two weeks of
community content for more on collections activities).

Here’s what an aging report looks like:

Invoice Customer name Amount Amounts Amounts Amounts Amounts Amounts
number due 1-30 days 31-60 days 61-90 days 91-120 days 120+ days
outstanding outstanding outstanding outstanding
outstanding

1401 King Coffee $1,000 $800
1537 Droege Insurance $2,000
1411 Fee Menswear $1,550 $500 $600
1336 Fulchini Construction $1,200 $450 $750
1558 Kim Attorneys at Law $950
1590 Mad Kau Productions $450 $300

Typically, aging reports are matched to the duration of payment terms. For example, if your terms are Net 15 days, your
most current bucket is set for those first 15 days. If you offer a variety of payment terms, it’s better to run the aging report
by invoice due date. Aging reports are standard reports in most billing/accounting systems. Check yours to see if one is
available.

Page 1

How to use an aging report 2

to be a more proactive relationship manager

An aging report readjusts the balance of power between you and your customers – in your favor. Many
business owners take something of a laissez-faire, hands in the air, “what can I do” approach to receiv-
ables. They think they’re at the mercy of their customers’ payment patterns. But if you can measure
something, you can better manage it. That includes relationships.

Often, outstanding receivables follow the 80/20 rule – the majority of your total receivables are made
up by only 20% of your accounts. An aging report helps you identify and prioritize accounts so that the
relationships needing more of your personal attention can get it. By targeting your collection efforts as
needed, you can more effectively reduce outstanding balances.

For the most current snapshot of your receivables, run an aging report according to the number and
frequency of the invoices you generate on a daily or weekly basis. For example:

If you issue invoices Weekly Biweekly or or monthly reporting
Daily

consider running the run a weekly report appropriate if you only issue a small number
report daily or every of invoices on a weekly or monthly basis
other day

Use aging reports in conjunction with automatic alerts from your accounting/billing system to notify you
as soon as an invoice becomes past due so you can take action immediately.

How to do a simple aging analysis on your own 3

To start, all you need to do is calculate the percentage of total receivables in each of your aging buckets – what
percentage is current, what percentage is 31-60 days old, etc. Next, compare against previous periods and
then watch for trends over time. This helps:

■  Spot unusual increases in receivables
■  Monitor delinquency levels and estimate write-offs
■  Highlight aging buckets that require extra attention
■  Monitor payment patterns

By themselves, these percentages won’t reveal much more than the proportion of past due account balances.
But when compared to prior months, they can reveal early warning signs of potential collection problems and
bad debt risks.

This analysis can be performed across all receivables. Or you can do it by individual customer, customer seg-
ment, or geography – essentially, any way you want to slice the data.

Page 2

How to get the most out of your aging report 4

As you can see, an aging report is a simple but highly effective tool. And like any tool, there are a few
things to keep in mind that can help boost its effectiveness. Be aware of:

■  Non-standard payment terms. Specific customers or invoices may have extended payment
terms. They’ll appear as past due on the aging report – and they’re not

■  Credit policy changes. Changes in your credit policy can lead to sudden changes in accounts
receivable or bad debt levels

■  How you’re running your report (i.e. by invoice date or due date)
Why not take a look at your accounting software and see if running an aging report is a standard feature?
The results might be surprising – and it could prove to be a tool you can no longer live without.

Do it today.

Your outstanding invoices aren’t getting any younger.

© 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each
member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should
not be used as a substitute for consultation with professional advisors.

Page 3

The numbers don’t lie:
Turning metrics into a performance roadmap

Last week’s blog post gave you a baseline understanding of how metrics help you measure – and better
understand – the ways cash moves in and out of your business. This week, we’re taking theory and putting it
into practice. In this example, you’ll see how Days Sales Outstanding (DSO) and a handful of other metrics
helped a small catering company gauge their collections performance over time.

About the company

• A – Z Catering, NY, NY
• What they’re good at: crowd-pleasing corporate breakfasts, lunches, and dinners
• What they’re good at: analyzing their cash position based on invoice collections

Let’s take a look at their current cash position for the month of November:

• They started the month of November with $4,000 in receivables yet to be paid from October and earlier
• November was a bang up month, with total sales of $8,000
• Of those sales, $2,000 was paid by check, on the spot. A – Z never invoiced their client afterward
• Of the remaining $6,000 in sales (all credit), A – Z generated invoices with Net 30 day terms (customer has 30 days to pay)
• During the month, A – Z collected $3,000 in currently due receivables (receivables outstanding less than 30 days) or past due

receivables (receivables outstanding more than 30 days)
So, A – Z Catering’s accounts receivable at the end of November was:

$4,000 (receivables balance at beginning of November)
+ $6,000 (credit sales during November)
– $3,000 (payments received during November)

= $7,000 (receivables balance at end of November)

For DSO, it doesn’t matter which invoices the $3,000 covers. All that matters is the A/R at the end of November.

Days sales outstanding (DSO): Since DSO is relatively close to their payment terms (Net 30),
that’s pretty impressive! This is a calculation that can be done
Ending Receivables X Days in Period every month to better understand collections performance.
Credit Sales in Period If the average collection time starts to creep up to 45 days or
beyond (for example), it could indicate weakening collection
DSO for the month is calculated as follows: efforts, a need to review credit policies, and review of the impact
of slower collections on their cash flow position and cash balance
$ 7,000 X 30 Days (# of days in November) = 35 days DSO (bank account).
$ 6,000
It is important to note that the time period is crucial while
This means that, on average, A – Z Catering gets paid in 35 days calculating DSO. For example, if the credit sales represents 30
days of credit sales, the number of days in the period should also
reflect 30.

While DSO is a great metric for any small business, this one
measurement alone isn’t a clear indication of performance.

A – Z Catering also took the following metrics into consideration:

Accounts Receivable Turnover Ratio:

Credit Sales in Period
Average Receivables Balance

The credit sales in the period is $6,000 and the average monthly receivables balance is $5,500 calculated as follows ([$4,000 beginning balance +
$7,000 ending balance]/2 = average balance).

$ 6,000 = 1.09
$ 5,500

In this case, the ratio may give a better view of collections. That’s because it incorporates an average of receivables across the month – rather than just
the month end balance. Regardless, monitoring the “trend” or changes in this ratio over a period of several months is the best way to use this metric.

Collections effectiveness index (CEI)

Beginning Receivables + (Credit Sales/n Months) - Ending Total Receivables X 100
Beginning Receivables + (Credit Sales/n Months) - Ending Current Receivables

$ 4,000 + ($6,000/1) - $7,000 X 100 = 75%
$ 4,000 + ($6,000/1) - $6,000

CEI is another measure of a company’s ability to collect on customer invoices. This is more precise than DSO, because it compares the total collected
against the total available for collection in a given time period. A CEI of 100% indicates very effective collection efforts.

Bad debt to sales:

Bad Debt (Net of Recoveries)
Credit Sales

In early December, A – Z decided that $100 of the receivables was uncollectable. They wrote this off as a bad debt.

$100 = 1.67%
$6,000

Such a low bad debt to sales ratio is an indication their credit policies are effective. Like all metrics, this is most effective when analyzed over time.
If this metric begins to trend upward, A – Z should take a closer look at tightening their credit policies and collection procedures to promote quicker
payments.

3 things to consider before sending an

account to third-party collections

Third-party collections can The early involvement of the right collections agency
be a tricky proposition. can increase your chances of getting paid in full. You
needn’t think of it as a method of last resort. But your
customer might interpret it that way. They could think
you’re making a last-ditch effort to get paid by sending
their account to collections. It might not send the right
message. And it could ultimately sour the relationship.

So when should or shouldn’t you involve a
collections agency?

Every company is different and timing is often
dependent on the extent of internal collection
efforts. But leading companies typically refer the
account if:

• I  t’s more than 90 days past due
• O  r the customer refuses to make a reasonable

payment commitment

If you have one or more accounts rapidly approaching that key 90-day mark,
consider the following before officially involving an agency:

Page 1

1 Sometimes explaining to a customer that there are
specific repercussions for non-payment can under-
Is withholding credit or score your seriousness. One of the most frequently
offering a payment plan employed techniques is the withholding of credit.
a viable option? There are no hard and fast rules for this.

Once an undisputed balance is more than 30 days
past due, many businesses put the account on
credit hold.

This can take multiple forms, including:

• H  olding future orders
• S  topping shipments on existing orders
• S  topping work (providing services) on existing

contracts
• W  ithdrawing open credit terms

Be firm but fair with your customers. Remind them
how much you value their business, but also remind
them that you’re running one too. Your goal here
isn’t to threaten or to be difficult. It’s simply to rein-
force that you’ve provided a good or service and are
entitled to payment. If anything, your customers will
likely respect you for your professionalism.
Another option is to put your customer on a payment
plan. However limited their ability or willingness to
pay may be, negotiating one can help you collect
what’s due. Payment plans are typically negotiated
when the customer can’t pay the past due balance
within a 30-day timeframe. So if you have an account
that’s already more than 30 days past due, you’re
well within your rights to offer this as an option.

Page 2

2 It’s good to have an outline of specific steps you
want to take at specific times in your collections
Have you exhausted your process. This is sometimes called a “collection
own internal collection treatment plan”. It’s good to have an outline of
efforts? specific steps you want to take at specific times in
your collections process. This is sometimes called
a “collection treatment plan”. By having one, you
create consistency across all your customers –
which helps make your efforts more effective.

When evaluating whether you or your staff have
made every effort to collect from a client, ask
yourself:

• H  ave I segmented different customers by risk
levels – and modified my approach with each
accordingly?

• H  ave I sent written communications or made
person-to-person contact?

• H  ave I sent payment reminders or made
proactive collections calls?

• H  ave I kept a log of all actions my staff or I
took relating to the account?

If you answered “yes” to these questions, there
might not be more to do internally. It might be time
to reach out to a third-party collections agency.

Page 3

3 Occasionally, it’s a good idea simply to chalk up a
loss and move on. Are you clear on what accounts
Is it better simply to write should be considered for a write-off and who has
off the account? authorization to do so?

Typically, businesses will write off an account if
their customer has:

• F  iled for bankruptcy
• G  one out of business
• N  ot made a payment in more than 120 days

despite internal (or external) collection efforts

You know your customers best. You also know how
willing you are to leave money on the table. If you
decide you’re ready to walk away, consider who
has the final say in doing so.

For example, if your business is large enough that
it has a credit manager, chief financial officer or
president, then usually:

• O  nly the credit manager has authority to write
off disputed balances or accept a compromise
as payment in full (and write off compromised
balances)

• T  he credit manager can only write off bad debt
up to a certain point

• T  he chief financial officer or company president
must approve in writing any bad debt write-off
that exceeds the credit manager’s limits

Page 4

Final thoughts It would be great if all customers paid exactly when you
wanted. Unfortunately, that’s not the case. But by thinking
about some of these points early on, you might be able to
avoid the need to send an account to third-party
collections.

One last tip.

If your business is large enough that you have a
sales team, consider paying sales commissions
when payment is received, not when the sale
occurs. If a commission isn’t paid until a sale
is collected, it gives your sales staff a vested
interest in collecting the account. And since
your sales team typically has the most face-time
with customers, they usually have the strongest
relationships with them as well. This combination
can ultimately help you reduce the number of
accounts that go to collections.

© 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member
firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors.

Page 5

Let’s take a look at their current cash position for the month of November:

By viewing the historical trends for these ratios, A – Z is able to gauge past performance, and use it as a tool for setting future performance goals.
They completed the following for each month, dating back to January, (when the company opened its doors).

Month Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov
Credit Sales
Collected 2,000 3,000 5,000 1,000 800 6,000 2,500 3,000 5,500 2,000 6,000
Beginning AR
Ending AR – 1,000 2,000 5,000 2,500 400 4,000 2,500 4,500 4,900 3,000
Average AR
Bad Debt – 2,000 4,000 7,000 3,000 1,300 6,900 5,400 5,900 6,900 4,000

2,000 4,000 7,000 3,000 1,300 6,900 5,400 5,900 6,900 4,000 7,000

1,000 3,000 5,500 5,000 2,150 4,100 6,150 5,650 6,400 5,450 5,500

– – 50 100 150 50 100 75 – 50 100

Month Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov
AR Turnover 2.00 1.00 0.91 0.20 0.37 1.46 0.41 0.53 0.86 0.37 1.09

CEI 0% 50% 50% 71% 83% 31% 58% 46% 76% 71% 75%

Bad Debt to Sales 0.00 0.00 0.01 0.10 0.00 0.01 0.04 0.03 0.00 0.03 0.02

InDeaSrOly December, A – Z de3c0id.e0d0that 4$100.000of the4r2e.c0e0ivables9w0a.0s u0ncolle9c0ta.b0l0e. The3y2w.5ro0te thi6s0of.0f a0s a ba5d5d.0eb0t 35.45 60.00 35.00

This$lo1n0g0-term=vie7w5%showed A – Z that their collections metrics were pretty erratic for the past 11 months. Although they started and ended the
peri$o6d,0w0i0th a strong DSO, there were several months where their collection window far exceeded their net 30 payment terms.

Similarly, their AR Turnover ratio showed there were a few months where collections were weak. Now they should go back through their records
and see if outside factors, (like limited contact with customers or vacation schedules), may have contributed to their low collection numbers.

The CEI trend analysis further drives home that A – Z is inconsistent with their collection efforts. They now plan to review which invoices were
collected during each time period to see whether there’s an issue with a single customer – or if partial payments contributed to the low CEI
percentages.

Finally, the company’s bad debt to sales ratio remained fairly consistent over the given time period. It’s probably a good idea for them to dig deeper
into their write off procedures. This will show if they’re properly classifying and writing off any bad debt portions of uncollectible accounts.

DSO

100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

AR Turnover

2.50
2.00
1.50
1.00
0.50
0.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

CEI

90%

80%
70%
60%
50%
40%
30%
20%
10%

0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Bad Debt to Sales

0.12
0.10
0.08
0.06
0.04
0.02
0.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

That’s not too difficult, right? Now it’s your turn.

Try using any or all of these metrics to gauge your business’s performance. Start out with a simple monthly measurement, like DSO. Then go back
and look at past trends. (A year is ideal, but a shorter window – like six months – is also effective.) Then start looking at the other measurements
discussed here. Before you know it, you’ll have much greater insight into your collections performance.
And with that knowledge comes the power to go forward and be even better than you are today.

© 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is
a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for
consultation with professional advisors.

Retrun to: Lisa King Portfoilio