11 Signs Your AR Portfolio May Be at Risk
And How to Change Things Up to Get Your AR Back on Track
In order to maintain optimal cash flow, your accounts receivable (AR) portfolio needs to remain in good shape. That can be a constant battle because all the mis-steps made during the order-to-cash (O2C) process will accumulate in your AR, and given time, clog it up. To prevent that from happening, you need to proactively monitor your AR and be ready to address any fundamental changes.
So what should you keep an eye on? Here are twelve situations that occur with AR Portfolios for which you should be on the look-out
1. Rising Days Sales Outstanding
DSO measures the average number of days it takes to collect payment after a sale. A rising DSO indicates that your collections are not matching the rate of new sales, and if that goes on for any length of time, your cash flow will not be able to support the volume of your current business operations. This may seem like pretty standard stuff, but if you are not tracking DSO on a monthly basis, you may not notice the trends.
2. Falling Percentage of Current Receivables
Persistent late payments and accounts becoming delinquent manifest themselves by tipping the balance away from current AR and are clear signals you are not collecting invoices on time. When this happens there is a direct impact on cash flow and liquidity.
3. Increasing Over 90 Day Past Due Receivables
It’s important to actively monitor your over 90 past dues because beyond that point invoices are increasingly difficult to collect. A growing volume of receivables overdue by more than 90 days indicates you are having severe challenges collecting payments before then, posing a significant risk of write-offs or bad debts.
4. Rising Customer Complaints Regarding Invoicing or Payment Terms
Incomplete or erroneous invoices can lead to disputes, delayed payments, or missed payments altogether. Increasing complaints from customers about invoice discrepancies, unclear payment terms, or disputes suggest that you have systemic problems with the potential to create significant payment delays or defaults.
5. Deteriorating Customer Relationships
Deteriorating relationships with customers may lead to delayed payments or defaults, as trust and communication break down. This often occurs when the aforementioned customer complaints are not being readily addressed or when getting the customer to pay becomes increasingly contentious.
6. Regularly Increasing Your Bad Debt Reserve
Consistently increasing your reserve for bad debts (monthly, quarterly, or annually) is an indication the risk of customer defaults within your AR portfolio is risisng. Commensurate with a rising expectation of defaults, is a worsening of the quality of your AR portfolio along with profit shrinkage.
7. Declining Customer Credit Scores
A good way to monitor the quality of your AR portfolio is to periodically (e.g., usually quarterly, semi-annually or annually) purchase or generate a credit score for each customer. If the dollar weighted average and/or median scores keep dropping, the probability for defaults is going to rise.
8. Increasing Concentration of Receivables with a Few Customers
Concentration risks are often overlooked. A heavy reliance on a few customers for a significant portion of your sales (and hence AR) exposes your business to substantial risk if one or more of these customers default or even just has trouble paying you on time.
9. Exposure to Natural Disasters
Customers in geographic locations prone to natural disasters, come with an increased risk of disruption to their business operations, supply chains, and customer solvency, thereby impacting accounts receivable. This problem is further compounded when coupled with concentration risks.
10. Unfavorable Industry or Marketplace Payment Trends:
Adverse payment trends within an industry, or regional and national markets, may indicate broader economic challenges are affecting your customers' ability to pay. Although you may be currently getting paid within terms, don’t expect those conditions to last.
11. Increasing Backlog of Credit and Collection Tasks
A backlog of credit and collection tasks is indicative of inefficient practices or the resources assigned to manage accounts receivable being overwhelmed. Any backlog will lead to delayed follow-up on overdue accounts and missed opportunities to accelerate collections.
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