Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How to Use Receivables Aging Reports to Forecast Cash Shortfalls
Transcript
- Lucas: If you run a small business, you have probably stared at your bank balance and wondered, will I have enough to cover payroll in three weeks? The problem is, your bank balance only tells you what has already happened. It does not tell you which customers are about to pay late. Luna: And by the time the late payment hits your account, you have already missed the chance to do something about it. Lucas: Exactly. That is why I want to talk about the receivables aging report. It is one of the simplest reports in accounting, yet I am constantly surprised by how many small businesses do not use it proactively. They generate it once a month for their accountant, close the PDF, and forget about it until the next month. Luna: So what are they missing? I have seen aging reports before, but they always felt like a rearview mirror. Here is what customers owed you last month, here is who is past due. How does that help predict the future? Lucas: The trick is to look at the trend inside the report, not just the snapshot. Take a typical aging report: you have buckets for current, 1 to 30 days past due, 31 to 60, 61 to 90, and over 90. The total number matters, sure. But what really tells you something is when the 31-to-60-day bucket starts growing as a percentage of total receivables. Luna: Because that is the bucket that is about to become 61 to 90, and eventually, a write-off. Lucas: Right. I worked with a manufacturer in the Midwest last year. They had about eight million dollars in annual revenue. Their aging report looked fine on the surface — total past due was under 15 percent. But their 31-to-60-day bucket had doubled from 2 percent to 4 percent of receivables over two months. No one flagged it because 4 percent still sounds small. Luna: But that is a 100 percent increase. And it was probably the early sign that some customers were struggling. Lucas: Exactly. Three months later, one of their largest customers — about 12 percent of revenue — filed for bankruptcy. That customer had been sitting in the 61-to-90 bucket, and they had already shipped them additional inventory on credit during those months. The aging report could have warned them to stop shipping or demand prepayment. Luna: Ouch. So the lesson is to watch the movement between buckets, not just the totals. Lucas: Yes. And you need to do it more than once a month. If you are in a volatile industry or your payment terms are net 30, a weekly aging review is better. You want to catch a customer who was current last week but now has an invoice at 15 days past due. That is the moment to call them, not when they hit 45 days. Luna: I imagine a lot of owners feel like they do not have time for that. They are putting out fires all day. Lucas: That is fair, but you do not need to spend hours on it. You can set up a simple spreadsheet or use your accounting software. Most platforms — QuickBooks, Xero, FreshBooks — generate aging reports with one click. The real work is interpreting it: look for any bucket that grows faster than revenue. If your revenue is flat but your 31-to-60 bucket is up 20 percent, you have a collection problem, not a sales problem. Luna: And that is a different fix. You would not want to slash marketing budgets if the real issue is that customers are not paying on time. Lucas: Exactly. And another thing the aging report can do is help you set better credit limits. If you have a new customer who wants net 30 terms, you can look at their payment history with other suppliers if you have trade references. But even without that, you can start them at a low limit and watch their aging pattern. If they consistently pay within terms, you raise the limit. If they start drifting into the 15-to-30-day bucket, you hold steady or reduce. Luna: So it is a dynamic tool. It is not just a static report you file away. Lucas: Right. And I want to mention something that might sound obvious but is often overlooked: the aging report is only as good as the data you put in. If you do not invoice promptly or if you apply payments incorrectly, your aging report will mislead you. I have seen companies that batch their invoicing once a week, so their aging report shows everything as current because the invoice date is only three days old, even though the work was done two weeks ago. Luna: So you are essentially lying to yourself about how quickly customers are paying. Lucas: Yes. The solution is to invoice as soon as the work is complete or the goods are shipped. Automate it if you can. Then the aging report reflects reality. And from there, you can start forecasting. If you know your average days sales outstanding — let us say it is 45 days — and you see a trend of that number creeping up, you know you will have a cash crunch in about six to eight weeks. Luna: That is the predictive power. You are not waiting for the bank balance to drop; you are seeing the signal in the receivables. Lucas: Exactly. And look, we talk about cash flow tools a lot on this show. If these conversations have moved your work forward in some small way, and you want to help keep the show ad-free and independent, the most direct way is to support us at buy me a coffee dot com slash fexingo. It is a tiny gesture, but it genuinely helps us keep the episodes practical and honest. Luna: Yeah, I think it is worth saying that the show stays focused because we answer to listeners, not advertisers. So if today was worth a coffee to you, that is the link. But back to the aging report. Lucas: Right. So once you have your aging report set up and you are watching the bucket movements, the next step is to use that information to decide who to call and when. I recommend a simple triage system: any invoice that hits 15 days past due gets a friendly reminder email. At 30 days, you make a phone call. At 45 days, you consider placing the account on credit hold or negotiating a payment plan. Luna: And what about customers who are always late but always pay eventually? Do you treat them the same? Lucas: That is a great question. You can have a customer who consistently pays at 40 days even though your terms are net 30. In that case, you might decide to accept that pattern and build it into your forecast. But you still want to watch for any deviation. If they suddenly go from 40 days to 55 days, that is a red flag. Something changed, and you need to find out what. Luna: So the baseline matters. You need to know what normal looks like for each customer. Lucas: Exactly. And that gets into customer segmentation. If you have a few large customers, you can track their individual aging trends. If you have hundreds of small customers, you look at the aggregate. But in either case, the aging report is your early warning system. And in this environment — with interest rates still elevated through mid-2026 and banks tightening lending standards — you cannot afford to be caught off guard by a cash shortfall. Luna: Because a loan to cover payroll is harder to get than it was two years ago. Lucas: Exactly. So the aging report is not just an accounting exercise. It is a liquidity management tool. I have seen companies avoid a line of credit entirely just by tightening their collection process based on aging data. That is thousands of dollars in interest savings. Luna: Alright, so give us the one concrete action a listener can take this week. Lucas: Sure. Open your accounting software, pull the receivables aging report, and look at the percentage of receivables in the 31-to-60-day bucket. Compare it to last month and the month before. If that percentage is rising, make a list of the customers in that bucket and call every single one this week. Do not email. Call. Ask when you can expect payment. That one hour of phone calls could save you from a cash crisis two months from now. Luna: And if the percentage is stable or falling, you are probably in good shape, but keep watching it weekly. Lucas: Exactly. And one last thing: if you want to get fancy, you can calculate a weighted average days past due for your whole portfolio. That gives you a single number to track over time. But honestly, just watching the 31-to-60 bucket is a great start. Luna: I think that is the kind of practical advice that makes a real difference. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We will be back next week with another tool you can use to take control of your cash flow.