Accounts Receivable Analysis: Meaning, Objectives, Importance

Data is king in the business world, especially when managing finances and operations. Of all the data businesses love to monitor, accounts receivable often tops the list. After all, it determines how much revenue your business receives. This, in turn, affects its ability to meet financial obligations, such as repaying business loans and making payroll. Is it time for your business to complete an accounts receivable analysis?

Accounts Receivable Analysis Meaning

This type of analysis reviews your company’s accounts receivable data to improve cash flow and make better business decisions. Sometimes companies outsource the process to a third party. However, handling it in-house makes it easier to control the process. These are some of the steps you can take:

1. Examine your customer base: Who are your best customers? Which ones take the longest to pay?
2. Review your invoicing process: Are you invoicing correctly? Do you need to make changes to the way you bill customers?
3. Analyze your payment terms: Should you change your payment terms? How well are the existing terms working?
4. Document your findings: What have you learned after completing the analysis? What job functions does it affect and how can you improve business processes?

Accounts Receivable Analytics Objectives

Determine what you hope to accomplish and why. Generally speaking, the main aim of this analysis is to help the business improve its A/R process. Consider these additional objectives:

• To better understand the customer base and develop strategies for improving customer relations
• To identify problem areas in the A/R process and make changes to improve efficiency
• To find ways to encourage customers to pay invoices on time

The Importance of Accounts Receivable Data

The accounts receivable team handles a lot of data, such as invoices and customer information. Consequently, failure to analyze this data can cause severe losses and missed opportunities. One of the best outcomes of analyses is that they can answer some pressing questions a business might have.

Consider the following examples:

• How much revenue does your business receive?
• How quickly are customers paying their invoices?
• What are the average days sales outstanding?
• Are you offering discounts for early payment?
• What is the company’s financial position?
• How much cash is the company gaining or losing?

Accounts Receivable Aging Analysis Purpose

Generating aging reports is one of the most common ways the A/R team tracks what customers owe and how much they owe. This metric generally breaks delinquencies into separate categories, usually in 30-day increments. The increments can vary across companies, but below is a typical example:

• 1 to 30 days delinquent
• 31 to 60 days delinquent
• 61 to 90 days delinquent

Companies generally time their dunning notices to these increments. With each new notice, the tone becomes stricter and more demanding. In some cases, the company might choose to send more frequent prompts for payment.

After 90 days, most businesses prepare to write off the debt. That could also involve severing ties with the client and selling the debt to a collection agency. Some companies might also choose to take the company to court.

KPI for Accounts Receivable

There are a few key performance indicators you can use to measure the health of your accounts receivable. The most common is DSO. This measures how quickly customers pay their invoices. While this is, by far, the most common metric A/R teams measure, it cannot operate in a vacuum. Consider these additional KPIs:

• Bad debt ratio: This measures the monetary value of receivables you believe you cannot collect.
• Percentage of invoices paid late: This gives you an idea of how many customers pay their bills on time.
• A/R turnover ratio: This measures how quickly you collect receivables.
• Aging analysis: This helps you understand which invoices are at risk of becoming delinquent.
• Collection effectiveness index: This measures how well you collect payments from customers.

Valuable Accounts Receivable Tools

You could invest a significant portion of time analyzing your A/R performance and strategizing. But, without the right tools, it will feel like an uphill battle. Look for an automation software that makes it easy to:

• Generate aging reports
• Analyze customer payment patterns
• Identify late-paying customers
• Manage invoices
• Automate dunning notice management

You might also need a payment processing system that provides your clients with various payment options. For example, some might prefer to pay in person via credit or debit card. Others might like to pay online. Some might even send paper checks.

The Bottom Line

Analyzing your accounts receivable data is critical to maintaining a healthy business. Review these objectives, KPIs, and tools to determine what fits into your overall business strategy. Automation is one of the most accessible tools to implement and can lead to the most significant benefits for your business. It also streamlines the calculation and presentation of the KPIs your managers need to make informed decisions.

Are you ready to see whether this cost-effective technology solution is the right option for your business? Book your free demo to get started.

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