Keeping track of money owed is important for your business’s working capital and long-term financial health. Even a profitable company with a full order book can suffer from cash flow issues if its late-paying customers go unnoticed.

Effective accounts receivable management is vital for avoiding cash flow disruption due to late payments. According to the illion’s September 2020 Late Payments Report, Australian businesses received payment 11 days late on average, with a 20% increase in the number of late payments compared to 2019.

With payment times increasing nationally, it’s more important than ever to understand accounts receivable and how it affects your business.

With payment times increasing nationally, it’s more important than ever to understand accounts receivable and how it affects your business.

Accounts Receivable Explained

Accounts receivable refers to the money owed to a business by its debtors. It’s the balance your customers owe for goods and services you have provided but have not yet been paid for.

Once you have fulfilled an order and raised an invoice, the funds owed to your business are categorised as accounts receivable until the invoice is settled.

The opposite of accounts receivable is accounts payable. When a third-party does work or supplies goods to your business and raises an invoice, the funds owed to the seller become part of your accounts payable.

Accounts Receivable Example

A Melbourne wholesaler receives an order from a Sydney-based retailer for $3,000 of goods. The wholesaler processes the order, ships the goods to the retailer, and raises an invoice for $3,000 on net 30 payment terms.

Once the Melbourne wholesaler processes the order and raises the invoice, it reduces its inventory value and increases its accounts receivable by $3,000.

The retailer pays their invoice promptly within 30 days. On receipt of payment, the wholesaler adds $3,000 to its cash balance and reduces its accounts receivable by $3,000.

What Is Ageing of Accounts Receivables?

Ageing of accounts receivable is a financial management technique used to evaluate the accounts receivable of a business. It’s a useful tool to ensure more efficient debtor management and payment collections.

Businesses typically supply goods and services to other companies on pre-agreed net payment terms of 30-120 days, depending on the terms of the arrangement. If the due date passes and the customer has not paid, the invoice becomes ‘aged’ – the invoice ages by the number of days since it was initially due.

The ageing method catalogues receivables based on when an invoice has been issued, when it is due to be paid, and the number of days it is overdue. It helps you to determine which customers to send to collections and who should receive follow-up invoices.

Ageing of account receivable is usually detailed in an ageing report. The ageing report will show each invoice by date and number. You can use this information to avoid overextending with customers that struggle to pay on time and make accurate predictions about money flows into your business.

What Does an Ageing Report Do?

An ageing report shows you how much money is owed to your business at any given time. The report will highlight:

  • How much each customer owes you
  • Which customers owe the most
  • How long each customer has owed you

Highlighting this information will help you understand which accounts need to be prioritised and collected first. Generally, the longer an invoice is left unsettled, the less likely you are to receive full payment of the sum owed. That’s why an ageing report is an important tool for managing your accounts receivable.

Using an ageing report to manage your accounts receivables will also help you to evaluate:

Credit Risk
You can use your ageing accounts receivable reports to ascertain which of your customers pose a significant risk of non-payment. If a customer currently owes a large sum to your business or has a history of failing to settle invoices on time, you should consider restricting future credit.

Collection Practices
If your ageing report reveals a significant number of older receivables that have yet to be paid, it may be an indication that your collection practices need to be improved. Many business owners struggle to find the time to chase invoice payments, with Australian small businesses spending an average of 12 days per year chasing outstanding invoices.

Bad Debt Allowance
Your accounts receivable ageing reports will help you to manage your bad debt allowance. If the recovery of a customer’s debt is no longer possible, it can be written off as bad debt and used to reduce your taxable income.

You can find out more about bad debt allowances on the Australian Taxation Office website.

Debt Factoring
If you apply for a debt factoring solution, your accounts receivable ageing report will be used by the finance company to determine which of your sales invoices will qualify for financing. Generally, a finance provider will only fund recent invoices issued to customers with a stable credit rating and timely payments history.

Ageing reports give you a comprehensive overview of your invoicing and collection processes. They provide the information you need to manage your cash flow effectively, create credit policies, and plan future expenditure.

Is Accounts Receivable an Asset?

Accounts receivable are classified as an asset. Although your business is yet to receive payment, receivables are the outstanding value owed to your business.

All accounts receivable should be recorded in the “current asset” section of your company balance sheet. If you have to wait a year or more to receive payment, a receivable is considered a long-term asset.

What Is Accounts Receivable Financing?

Accounts receivable financing is a form of business funding secured against the value of outstanding invoices. This type of finance helps businesses overcome cash flow gaps caused by late-paying customers and extended payment terms.

In a typical business transaction, the goods or services supplier will fulfil the order and raise an invoice. The customer will then typically take 30+ days to settle the invoice. For the supplier, the value of the invoice is tied up in the accounts receivable until the customer pays.

Accounts receivable financing allows the supplier to unlock the outstanding invoice’s value and get paid faster for the goods and services they have already sold. These funds can be used to manage day-to-day cash flow, cover operational expenses, and purchase new inventory and raw materials needed to take on new orders.

Unlike a traditional bank loan, the accounts receivable finance provider is interested in the debtor’s creditworthiness, the invoice’s age, and the sum owed. You don’t need to use any property as collateral, and funding can be secured much faster than traditional financing methods.

Read our case study to see how accounts receivable financing helped Queensland-based family business Mantis Building Services become a labour-hire power player.

Types of Accounts Receivable Financing in Australia

Invoice Factoring
Invoice Factoring is a funding solution where your business sells its outstanding invoices to a finance company. Once the invoice is accepted for factoring, the finance company will take on the responsibility of collecting payment from the debtor.

You can receive up to 95% of the value of your unpaid invoices as a cash advance. When the finance company collects payment, you will receive the remaining balance of the invoice less factoring fees.

Invoice Factoring can be a good solution for businesses that encounter cash flow gaps due to extended payment terms and lack dedicated accounts and collections departments. The finance company will take responsibility for credit control and collections. They can credit check customers, chase payments and liaise with them on your behalf.

Typically, factoring is used by small businesses and start-ups who need regular and quick access to funding to support sustainable growth.

Invoice Discounting
Invoice Discounting shares some similarities with invoice factoring. You can use your accounts receivable as collateral to access immediate funding. Once an invoice is accepted for discounting, you can receive up to 85% of the invoice value upfront. Once your customer pays the invoice, you receive the remaining balance less fees.

The significant difference between discounting and factoring is the collection of the outstanding invoice. With discounting, your company remains responsible for the collection of all receivables. Your customers will typically be unaware of your relationship with the finance company.

Due to the collections and account management remaining in-house, Invoice Discounting is generally better suited to larger companies with an established collections process.

Read our guide Invoice Discounting vs Factoring to find out more about the different invoice finance types and find out which is better suited for your business.

Selective Invoice Finance
Selective Invoice Finance is a flexible form of accounts receivable financing that allows businesses to choose which invoices they want to submit for funding.

Invoice factoring is typically a full-service where the whole sales ledger is used to secure financing. Selective Invoice Finance is a flexible form of funding that can be an effective solution for businesses that suffer from seasonal sales fluctuations or need to raise capital for an unexpected expense quickly.

ScotPac Accounts Receivable Financing

We help businesses unlock the value of their assets and get the funding they need to grow. If you’d like to hear how Invoice Finance could help your business, contact our team of expert business finance advisors or fill out the form below, and we’ll get back to you shortly.