A New Age

We have developed two new accounting tools to improve cash management of
receivables and unbilled work-in-progress. Both of these are spreadsheet applications which you can have by contacting us.

Accounts Receivable

All business people are familiar with the traditional accounts receivable ageing report. First, each customer’s account is analysed to determine the age of each outstanding invoice. Typically, the time demarcations are “current, 30, 60 and 90+ days“. Then, all of the customers’ breakdowns are summed by ageing period. The traditional ageing report then shows each ageing period’s total as a percentage of total A/R.

In fact, this traditional report masks your actual collection success, particularly if your monthly sales vary significantly. Large sales in the current month can cause smaller proportions to show for the ageing periods in arrears. You would deduce that your old A/R is under control, since the proportions fell from prior period comparisons.

Our new approach uses the same raw data but in a different fashion. Consider “December’s” ageing report. The 30-day receivables in fact emanated from November sales. The 60-day receivables emanated from October sales. The 90+day receivables emanated from September and prior.

Our new ageing report would reflect the “December-30 day” A/R as a percent of November (not December!) sales. Similarly, the 60 day A/R would show as a percent of October sales. (Note that this approach doesn’t work for 90+ days A/R since they are derived from multiple months’ sales). The December ageing report will show how well October and November sales are coming in. A three month comparison of the October through December ageing reports, using the respective current, 30 and 60 day columns, would show the rate at which October sales are coming in.

Work-in-Progress

Professionals or manufacturers may keep track of unbilled time and/or costs on projects in progress. Often, these amounts are not billed to the client/customer until the project is completed. As a result, the business has to fund that build-up of costs through its own working capital until an invoice is issued to the customer. Again, the traditional ageing analysis ages the unbilled costs back in time, like an A/R report. This information is marginally useful in predicting the timing of future cash inflows; all it does is tell you how old your cost accumulations are.

Our new approach ages forward in time to when the W-I-P will be billed. The process involves totaling the W-I-P by customer and then projecting when that account will be invoiced. Then, you sum all of these “forward” totals for all customers and calculate the relevant proportions and dollars outstanding-forward by period.

Both the data on absolute dollars and relative proportions outstanding-forward will bear information value. The former will indicate better when cash inflows can commence. The latter will be useful in time in comparing the proportions over the year cycle of your business. This information may help you identify the peaks and valleys of your cash inflows. In turn, this may help you determine your highest requirement for working capital financing for negotiating with your banker. This knowledge may spare you the grief of tight cash flow periods caused by inadequate financing.