As a business owner, making sure you have enough money coming in is a top priority. But you also need to account for the following:
- How do you make sure your customers pay you on time?
- How do you spot customers who might not pay before it becomes a problem?
- How do you set credit terms that work for you?
- How can debtor analysis help you spot risks early, forecast cash flow, and reduce bad debts?
These are common questions businesses like yours face.
In this article, we will unwrap the powerful roles debtor analysis contributes to improving cash flow, control of credit risk, and having your business thrive.
From ageing reports follow-up to actionable data-driven findings, we present how this activity can guide a financial decision with the aim of thriving. Let’s get started!
Understanding Accounts Receivable Analysis
Accounts receivable analysis (debtor analysis) looks at unpaid customer bills to check payment patterns and credit health. By looking at payment trends, late payments, and credit usage, companies can spot problems in collecting money and find risky customers.
Core functions of accounts receivable analysis include:
- Evaluating adherence to payment terms.
- Identifying customers with delayed or irregular payment patterns.
- Enhancing cash flow predictability through receivables trend analysis.
- Optimising credit control strategies to minimise the average collection period.
Identifying Risks Through Accounts Receivable Analysis
Accounts receivable analysis provides the necessary framework through the structured identification of risks that are likely to destabilise an SME’s finances. It is actually through the crucial metrics—Accounts Receivable Turnover Ratio and Days Sales Outstanding (DSO)—that companies highlight inefficiencies as well as areas that are more likely to weaken them in collection and receivables.
Key indicators of risks include:
| Key Indicator | What Is It? | Importance |
| Days Sales Outstanding (DSO) | DSO shows how long it takes customers to pay the business. | A low DSO means good collection, while a high DSO shows payment delays that hurt cash flow and operations. |
| Accounts Receivable Turnover Ratio | Calculates how often a business collects its average receivables in a given period. | A high ratio indicates that credit management is effective and collections are prompt. A declining ratio indicates an inefficient collection mechanism, which may lead to cash flow constraints in the future. |
| Ageing Schedule | Divide receivables into overdue periods (for example, 30, 60, and 90+ days). | Helps to track patterns of delayed payments, raising red flags over high-risk customers and allowing for specific credit control measures. |
| Bad Debt Ratio | The percentage of unpaid bills compared to total sales. | A rising bad debt ratio shows increasing credit risks, meaning the business should review how it approves credit. |
| Customer Credit Utilisation | Tracks the percentage of credit limits used by each customer. | High utilisation levels, particularly when combined with late payments, can indicate potential credit risks and the need for revised credit policies. |
| Payment Trend Analysis | Studies historical payment behaviours to discern patterns or inconsistencies. | Finding payment problems early lets businesses fix issues to protect their cash flow. |
| Dispute Frequency | Tracks how many times customers question their bills during a set time. | Lots of questions can mean there are problems with how things run or unhappy customers, which can slow down payments and hurt business relationships. |
Methods for Spotting Risks in Accounts Receivable
A variety of methods are employed to identify risks within accounts receivable processes:
Aging Schedule Analysis
Segment receivables by overdue periods (e.g., 30, 60, 90+ days) to identify persistent payment delays and flag high-risk customers.
Trend Analysis
Check past payment records to find unusual patterns, like sudden increases in late payments or worsening payment reliability.
Credit Control Reporting
Make reports that track customer credit usage and payment patterns to help target problems.
Predictive Analytics
Use AI tools to predict payment patterns and spot possible defaults, helping make better decisions early.
Invoice Factoring
Evaluate the feasibility of selling receivables to third parties for immediate liquidity, safeguarding operational stability.
How Accounts Receivable Analysis Works: A Detailed Example
In order to understand the value of accounts receivable management and potential risk, let’s use an example case: Greenfield Supplies, an SME offering environmentally friendly packaging. In a period of six months, Greenfield Supply detects an alarming increase in DSO from 45 days to 60 days. This implies that the time elapsed between when customers place their orders, and the payments is getting slower.
Step 1: Data Analysis
Greenfield begins by analysing its receivables using an ageing schedule. Upon review, it was discovered that 30% of the outstanding receivables were overdue by 90 days or more, amounting to £50,000 of their total £200,000 in receivables. This pattern of late payments is a cause for concern about cash flow problems.
Step 2: Credit Control Review
Diving deeper into the Credit Control Report, there is an apparent significant amount of debt outstanding in arrears to the tune of £20,000. It appears that EcoMart Ltd is the customer who has an inconsistent pattern of payments. Payments from this customer have frequently passed beyond the due date. On top of this, the company has exhausted 90% of the available credit.
Step 3: Predictive Insights
Greenfield utilises Predictive Analytics to forecast the likelihood of further payment delays from EcoMart. The analytics predict a high probability of continued delays due to EcoMart’s historical payment patterns and its current financial instability. This predictive insight allows Greenfield to take preemptive measures to manage the risk.
Step 4: Mitigation Measures
To mitigate the risk of non-payment, Greenfield negotiates revised payment terms with EcoMart, which include partial upfront payments for future orders. Additionally, Greenfield reviews and tightens its credit policies, reducing credit limits for high-risk customers, including EcoMart, and introducing stricter monitoring procedures.
Outcome
Through these proactive measures, Greenfield successfully reduces its DSO to 50 days within three months. Furthermore, the company recovers 60% of the overdue amount, significantly stabilising its cash flow.
How Pulse Can Help You Take Control
Imagine the scenario of Greenfield Supplies. This firm was in a position to detect risks at an early stage and reassess credit terms for a proactive step in recovering delayed payments. The business would identify risks early but take data-driven actions to better its financial health while freeing time to focus on growth and innovation. Accounts receivable analysis, when supported by the right tools, becomes a cornerstone of sound financial management.
This is where Pulse’s Debtor Analysis Module steps in. For SMEs like yours, Pulse offers a sophisticated, data-driven approach that helps streamline the entire debtor management process, just like Greenfield Supplies did. Here’s how Pulse can take your debtor analysis to the next level:
Proactive Debt Management
Pulse provides you with an advanced debtor management system that alerts you about potential overdue accounts before they become a real issue. It identifies payment trends and flags accounts that are at risk of default, allowing you to take proactive action, just like Greenfield did with EcoMart Ltd. With Pulse, you’re not waiting until the situation becomes a financial burden – you’re ahead of it.
Time-Saving Automation
Pulse seamlessly integrates with Open Accounting and Open Banking, collecting data in real-time across multiple bank accounts. No more manual data entry! Automated financial insights will help you decide which customers to follow up on, when to change payment terms, and how to resolve a dispute through one intuitively insightful dashboard.
Data-Driven Decision Making
Through predictive analytics, Pulse evaluates the payment behaviours and tries to find the pattern that would probably lead to a potential delay in payment. This helps you set practical credit terms based on real customer data and reduces the risk of bad debts.
For example, if Pulse determines that a particular customer is habitually delaying payments, you can change their credit limit or offer them new payment terms before it affects your cash flow. Pulse’s Debtor Analysis will help you better control your receivables and streamline your cash flow so that you do not fall prey to financial risks before they get sour.
Acting early by using the intuitive features of Pulse can ensure you protect the financial health of your business and secure long-term success. Book a demo today by contacting us at info@mypulse.io and discover how debtor analysis through Pulse can transform your accounts receivable management. Get ahead and be informed – take control of better financial decisions!
