Aging of receivables method: How SaaS companies manage cash flow

In SaaS, managing cash flow is paramount. The aging of receivables method offers a vital framework for tracking outstanding invoices, optimizing cash flow, and understanding customer payment patterns. 

Our post explores the intricacies of accounts receivable (AR) aging, its impact on SaaS businesses, and how to leverage it effectively.

In this article, you'll learn:

• What the aging of receivables method is, and why it's crucial for SaaS companies
• How to create and interpret AR aging reports for actionable insights
• Common challenges in AR aging and their solutions
• Tools and strategies for efficient receivables management in SaaS

Let’s get started by defining the aging of receivables method. 

What is the aging of receivables method?

The aging of receivables method is an accounting practice that categorizes a company's unpaid customer invoices based on how long they have been outstanding. 

Think of it as sorting your bills into different buckets based on their due dates. These "buckets" are typically divided into 0 to 30 days, 31 to 60 days, 61 to 90 days, and over 90 days.

What are aged receivables?

They're simply the invoices that have been grouped into these time categories. Why does this matter? Because the longer an invoice goes unpaid, the higher the chance it may become uncollectible. 

The aging of receivables method, sometimes referred to as AR aging, helps businesses like SaaS companies identify and track these potentially problematic invoices. This approach allows them to take steps to recover payments, adjust credit policies, and make informed decisions about extending credit to certain customers.

The aging of receivables method is a critical tool for managing cash flow and maintaining a healthy financial standing, especially in the recurring revenue model of SaaS companies.

Why the aging of receivables is important for SaaS companies

SaaS companies often face unique challenges when it comes to managing their cash flow. Why? Because their revenue stream is typically based on subscription models with recurring payments, often billed monthly or annually. 

This issue can sometimes lead to delayed payments and a bit of a guessing game when it comes to predicting incoming cash.  

That's where the aging of receivables method comes in. 

It provides a clearer picture of outstanding invoices and potential revenue roadblocks. Here's how it helps SaaS companies:

• Identifying overdue accounts: By categorizing invoices based on their age, SaaS businesses can quickly identify which accounts are overdue and require attention. This allows for prompt follow-up and reduces the risk of invoices slipping through the cracks.
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• Improving cash flow planning: With a better understanding of outstanding payments, SaaS companies can more accurately forecast their cash flow. Accurate forecasting allows for better financial planning, investment decisions, and overall business stability.
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• Assessing customer payment habits: The accounts receivable aging report provides valuable insights into customer behavior. Are certain clients consistently late with payments? Are there patterns that emerge? 
  
  This information helps SaaS companies tailor their credit policies, identify potentially risky clients, and make informed decisions about offering payment plans or incentives.

Remember: The aging of receivables method empowers SaaS companies to take control of their financial health and navigate the sometimes unpredictable waters of subscription-based revenue models.

What are the key components of an AR aging report?

An AR aging report is like a snapshot of your outstanding invoices at a point in time. It provides a structured view of what's owed to your business and helps you understand the overall health of your accounts receivable. 

Here are the key components that make up an AR aging report:

• Total outstanding invoices: This is the big-picture number – the total amount of money owed to your company by customers. It's the sum of all those unpaid invoices.
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• Aging categories: This is where the "aging" part comes into play. Invoices are grouped into categories based on how long they've been outstanding.
  
  Common categories include "current" (not yet due), 0 to 30 days overdue, 31 to 60 days overdue, and so on. This categorization allows you to quickly see which invoices are becoming increasingly overdue.

• Customer-specific details: The report also provides details about each customer with outstanding invoices. This data might include their contact information, a list of their specific overdue invoices, the total amount they owe, and their payment history. 

By combining these key components, an AR aging report gives you a tool for managing your receivables and guaranteeing timely payments. It's a cornerstone of the aging of receivables method and an essential resource for SaaS companies looking to maintain a healthy cash flow.

How to create an accounts receivable aging report

Creating an accounts receivable aging report doesn't need to be a daunting task. In fact, it can be fairly straightforward. Here's a breakdown of the process:

1. Gather invoice data. Start by collecting all relevant information about your outstanding invoices. This includes the invoice number, customer name, invoice date, due date, and the amount due.  
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2. Categorize invoices by age. Next, sort your invoices into different aging categories based on how long they've been outstanding. 
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3. Calculate totals. For each aging category, calculate the total amount of money owed. This gives you a clear picture of how much of your accounts receivable is overdue and for how long.
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4. Analyze patterns. This is where the real insights come in. Look for trends in your data. Are certain customers consistently late with payments? Are there any patterns that emerge across different aging categories?

How to interpret AR aging reports for actionable insights

Once you've created your AR aging report, it's time to put it to work! Here's how to interpret the data and turn it into actionable insights:

• Prioritize follow-up. The aging report helps you prioritize your collection efforts. Focus on the oldest and largest outstanding invoices first. These are the ones most at risk of becoming uncollectible.  
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• Identify at-risk customers. The report helps you identify customers with a history of late payments. You can then make informed decisions about credit limits, payment terms, or whether to continue doing business with them.  
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• Adjust credit policies. If you notice a significant number of overdue invoices in certain aging categories, it might be time to revisit your credit policies. Consider offering incentives for early payments or implementing stricter consequences for late payments.
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• Improve cash flow forecasting. Use the aging report to get a better handle on your cash flow. By understanding your outstanding receivables, you can more accurately predict incoming payments and make better financial decisions.

By regularly generating and analyzing AR aging reports, SaaS companies can gain valuable insights into their customer payment behavior, improve their collections process, and ultimately keep their finances healthy.

Common challenges and solutions in AR aging

Even with the best of intentions, challenges can arise when managing accounts receivable. Let's explore some common hurdles SaaS companies might encounter with AR aging and discuss practical solutions.

Delayed customer payments

Late payments can be a real headache for SaaS businesses, disrupting cash flow and making financial planning a challenge. This issue can be even more pronounced with subscription models where payments are spread out over time.

Solution

• Establish clear payment terms: Make sure your payment terms are clearly communicated to customers from the get-go. This includes due dates, accepted payment methods, and any consequences for late payments.
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• Use reminders and follow-ups: Don't be shy! Send automated payment reminders before and after the due date. For overdue invoices, follow up with personalized emails or phone calls.
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• Offer incentives: Consider offering small discounts for early payments or implementing a rewards program for consistent on-time payers.

Inaccurate or incomplete invoicing data

Inaccurate or incomplete invoicing data can throw off your entire AR aging process. This issue can lead to miscategorized invoices, incorrect aging reports, and ultimately, flawed financial decisions.

Solution

• Invest in automation: Automated invoicing systems can help reduce human error and ensure data accuracy. They can also integrate with your accounting software to keep everything in sync.
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• Regularly audit data: Make it a habit to regularly review and audit your invoice data for any errors or inconsistencies.
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• Implement data validation checks: Use software that includes data validation checks to catch errors before they make their way into your AR aging reports.

Lack of automated tools for tracking aging receivables

Manually tracking AR aging in spreadsheets can be time-consuming and prone to errors. This tedious problem is especially true for SaaS companies with high volumes of recurring invoices.

Solution

• Embrace automation: Invest in accounting or subscription management software that offers automated AR aging tracking. This will free up valuable time and reduce the risk of errors.
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• Real-time tracking: Look for tools that provide real-time insights into your AR aging. This allows you to stay on top of overdue invoices and take action promptly.
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• Customized reporting: Choose software that allows you to generate customized AR aging reports based on your specific needs. This approach might include filtering by customer, aging category, or invoice amount.

Tools and strategies for managing aged receivables in SaaS

Managing aged receivables effectively requires a blend of the right tools and smart strategies. Let's explore some options that can help SaaS companies stay on top of their AR aging.

Tools for AR aging and invoicing

When it comes to tools, SaaS companies have a few options. Accounting software like QuickBooks, Xero, and Sage Intacct offer features for AR aging tracking, automated invoicing, and reporting. 

Alternatively, subscription management platforms such as Chargebee, Zuora, and Recurly cater specifically to subscription businesses with tools for recurring billing, revenue recognition, and AR management. 

While not ideal for high volumes, spreadsheets like Google Sheets or Microsoft Excel can be used for basic AR aging tracking.

Benefits of automation

Regardless of the specific tool, automation is key. By automating tasks like invoice generation and AR aging calculations, SaaS companies can reduce errors, save time, and gain real-time insights into their receivables. 

Remember: Automation allows finance teams to focus on more strategic activities, like analyzing trends and developing effective collection strategies.

Strategies for efficient receivables management

Speaking of strategies, there are several approaches SaaS companies can take to manage their aged receivables efficiently. Offering incentives for early payments can motivate customers to pay their invoices promptly. 

Providing flexible payment plan options can help customers facing financial difficulties stay on track and avoid falling significantly behind. Regularly auditing AR aging reports can help identify recurring issues, allowing for quick problem-solving.

Orb's role in managing aged receivables

Orb may not be a dedicated AR aging platform, but it plays a crucial role in helping SaaS companies effectively manage their aged receivables. By providing robust and flexible billing infrastructure, Orb empowers businesses to:

• Gain accurate insights: Orb's real-time usage tracking and detailed billing data can be used to confirm that your AR aging reports are accurate and up-to-date. The Orb RevGraph ensures accurate, error-free billing by ingesting and processing all your raw event data. Say goodbye to revenue leakage and billing inaccuracies.
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• Keep cash flow healthy: With Orb, you can implement a variety of pricing models, including usage-based pricing, tiered plans, and per-user pricing. This feature allows you to tailor your pricing strategy to your specific needs and improve your cash flow, along with our other SaaS billing tips.
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• Improve customer relationships: Orb's simplified billing and invoicing processes help ensure timely and accurate billing, reducing customer frustration and improving satisfaction.
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• Scale with confidence: Orb's scalable architecture and flexible API make it easy to adapt your billing system as your business grows and evolves.

Ready to transform your pricing and billing processes? Try Orb today and explore our flexible pricing options to find the ideal plan for your company.