Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How to Use Receivables Aging to Negotiate Better Terms
Transcript
- Lucas: There is a report sitting in your accounting software right now that most small-business owners print, glance at, and then ignore. And it might be the single most useful document you have for negotiating better payment terms with your customers. Luna: You are talking about the receivables aging report, right? That bucket breakdown of who owes what and how overdue they are? Lucas: Exactly. The standard aging report shows you balances in 0-to-30 days, 30-to-60, 60-to-90, and over 90. But that is the bare minimum. If you want leverage to actually change terms, you need to go deeper. I want to talk about a 13-month rolling aging schedule — one that tracks each customer's payment pattern month by month. Luna: If these conversations have moved your work forward in some small way, it would mean a lot if you considered supporting the show at buy me a coffee dot com slash fexingo. That kind of listener support is what keeps this ad-free and focused on what actually helps. Lucas: Yeah, absolutely. And it is because of that support that we can spend an entire episode on a single spreadsheet technique. So, the 13-month aging. Why thirteen? Because you want to see a full year plus one month — that extra month catches the seasonality that a 12-month view might smooth over. For example, a customer who always pays in 45 days during Q4 but stretches to 55 in Q2. If you only look at a 12-month average, you miss that pattern. Luna: So the 13-month view helps you distinguish between a consistently slow payer and someone who just has seasonal timing issues? Lucas: Precisely. And that distinction is everything when you sit down to negotiate. I worked with a wholesale distributor last year — about $2.3 million in annual revenue, 80 active customers. Their standard terms were net-60. But they had five customers who represented forty percent of their revenue, and those five were paying, on average, at day 72. So they were effectively giving those customers an extra 12 days of float. Luna: And the cost of that float adds up. At a 7 percent cost of capital, 12 days on roughly $920,000 in annual revenue from those five customers — that is a real number. Lucas: It is about $2,100 a year in financing cost just from that delay. Not catastrophic, but enough to notice. More importantly, the aging report showed that those five customers had never once gone past 75 days. They were reliably late by about the same amount every single month. That consistency gave the distributor leverage. Luna: Because if someone is consistently late by 12 days, you can argue that their actual payment cycle is closer to 72 days — so why not set terms at net-45 and give them a 3 percent discount if they pay by day 30? You are just formalizing what is already happening. Lucas: Exactly what they did. They approached each of the five customers with a one-page summary: their average payment date over the trailing 13 months, the range, and the proposal. Four of the five agreed to shift to net-45 within two billing cycles. One held out at net-60 but accepted a 2 percent discount for payment within 30 days. That one became their fastest payer within three months. Luna: So the aging report was their evidence. They weren't asking for a favor — they were saying, 'Here is the data, here is the proposal, this aligns with your actual behavior.' Lucas: Right. And that is the key. Most small-business owners feel like they have no power in these conversations. But a 13-month aging report gives you objective proof. You can show a customer that their average payment date is 68 days, that the standard deviation is only 4 days, and that moving to net-50 or net-45 just recognizes reality. It is hard to argue with your own payment history. Luna: What about the flip side? What if a customer is erratic — sometimes paying in 30 days, sometimes in 90? Does the aging report still help? Lucas: It helps even more, actually. Because erratic payment patterns are a risk signal. If a customer has a 60-day range in their payment timing, you need to find out why. Maybe their internal approvals are inconsistent. Maybe they are managing their own cash flow by stretching you. Either way, you want to flag that account and either tighten terms or increase your allowance for doubtful accounts. The aging report gives you the data to have that uncomfortable conversation. Luna: And you can use the same report to identify your best customers — the ones who consistently pay early or on time. Those are the ones you might want to reward with better terms or a loyalty discount. Lucas: Exactly. One thing we did with that distributor was create a 'customer payment velocity' metric. It is simple: the average number of days from invoice date to payment date, weighted by invoice amount. So a $50,000 customer who pays in 30 days has more weight than a $5,000 customer who pays in 40. Then we ranked all 80 customers by that velocity. The bottom 10 percent became the focus for renegotiation. The top 10 percent got a thank-you call and a small discount on their next order. Luna: I like that — it turns the aging report from a passive tracking tool into an active management tool. You are not just watching what happens; you are using it to shape future behavior. Lucas: And the beauty is, you can build this in Excel or Google Sheets in about an hour. Export your invoice and payment data from your accounting system, create a pivot table with customer names as rows, months as columns, and the sum of outstanding invoices as values. Then add a row for each customer's average days to pay. That is your 13-month aging schedule. Luna: One thing I want to flag: you need clean data. If you have partial payments, credit memos, or disputed invoices mixed in, the aging report can give misleading signals. You might see a 60-day overdue invoice that is actually in dispute. Lucas: Great point. You should always segment out disputed invoices. We usually recommend a separate 'dispute aging' report. Otherwise you are negotiating terms based on a number that includes invoices the customer isn't even planning to pay until the issue is resolved. That undermines your credibility. Luna: So the clean version: exclude disputes, exclude credit memos, and only include invoices that are genuinely due and unpaid. Then run your 13-month aging. Lucas: Right. And once you have that clean report, you can do something even more powerful: you can calculate the 'implied interest rate' you are offering each customer. If a customer pays on day 72 on net-60 terms, they are effectively borrowing from you for 12 days. If your cost of capital is 7 percent, that implicit loan costs you about 0.23 percent of the invoice amount every month. Over a year, that is nearly 3 percent of revenue from that customer, just in financing costs. Luna: That is a number that gets a business owner's attention. Suddenly the aging report is not just an accounting exercise — it is a profit and loss statement for each customer relationship. Lucas: Exactly. And if you present that number to a customer — not in an accusatory way, but as a business reality — you can often find a win-win. Maybe they can't pay faster, but they can accept a slight price increase to cover your financing cost. Or maybe they can pay by credit card, and you eat the 2 percent fee but get paid in 2 days instead of 72. Luna: I have seen companies use aging data to justify switching customers to prepayment or cash-on-delivery. If someone is consistently 90 days late, you might decide the relationship is not worth the working capital drag. Lucas: It is a hard conversation, but the aging report makes it objective. You are not saying, 'We don't trust you.' You are saying, 'Our cost of carrying your receivables is X, and we need to adjust terms to reflect that.' Most professional buyers understand that logic. Luna: What about the timing? When do you pull out this report and start the conversation? Lucas: I recommend a quarterly business review with your top 20 percent of customers by revenue. Use that meeting to present a one-page 'customer health score' that includes payment velocity, aging trend, and any disputes. Frame it as a partnership check-in: 'Here is how we are doing together. How can we improve?' That is when you slip in the terms proposal. Luna: So it is not a cold email saying, 'Your payment history is bad.' It is a scheduled conversation where you both look at the data. Lucas: Exactly. And if you have run the 13-month aging, you can show the trend line. Maybe their payment velocity has been improving over the last six months. You can acknowledge that and still propose a terms adjustment that locks in the improvement. It is collaborative. Luna: One more thing: the aging report also helps you internally. If you are trying to get a line of credit or a receivables financing facility, lenders will ask for your aging schedule. A clean, well-organized 13-month history shows you manage receivables seriously. That can improve your borrowing terms. Lucas: Great addition. And if you are applying for a loan, lenders often use a measure called 'weighted average collection period' — essentially the same as customer payment velocity but for your whole portfolio. A low number signals efficiency. A high number signals risk. So cleaning up your aging and negotiating better terms directly improves your credit profile. Luna: So the takeaway: the receivables aging report is not just a backward-looking snapshot. It is a forward-looking negotiation tool, a customer segmentation tool, and a financing preparation tool all in one. Lucas: And you can start today. Pull your last 13 months of invoice data. Build the pivot table. Identify your top five slowest reliable payers. Prepare a one-page proposal. That one conversation could shorten your cash conversion cycle by a week or more. I have seen it happen. Luna: I think a lot of listeners will be surprised by how much leverage they actually have. The data is sitting there, waiting to be used. Lucas: It is. And the next step after that is to automate the 13-month aging so it updates in real time. But that is a topic for another episode.