Managing Financial Risk: The Problem with Invoice Aging Reports

This article originally appeared on CRFonline.org.

A customer you have carried for nine years, one who has never given your team a reason to worry, slides from net-30 to net-45 over two quarters, and then to net-50. Nothing else about the account changes; they still answer the phone, still place orders, and keep their invoice disputes rare and legitimate. Luckily, your accounts receivable software is designed for managing financial risk. The invoice aging report flags the drift in payment delinquency, and your instinct says to tighten this customer’s credit limits.

But that instinct may be exactly wrong.

For most of the last decade, a slow-paying customer meant one of a small number of things, and most of them were some flavor of trouble. However, that is no longer a safe assumption. A growing share of the slow payments landing in your aging report has nothing to do with financial distress and everything to do with how your customers are now managing their own liquidity. They’re hanging onto cash longer as a way to optimize working capital.

Slow Payments Have More Than One Cause Now

When a company can borrow money cheaply, stretching an invoice payment deadline is a minor advantage. When borrowing is expensive, those same unpaid invoices become one of the cheapest sources of working capital a buyer can find. A disciplined treasury team will use this strategy on purpose, and more of them are doing exactly that. Additionally, trade credit has quietly become the line of credit healthy customers are drawing on deliberately to preserve their cash availability.

The behavior shows up across the board. In Billtrust’s most recent Economic Headwinds survey of finance leaders, 67% reported that their customers are paying slower than they were six months earlier, and one in five described the slowdown as significant. That number matches what credit and collections teams are already watching in their own aging: a lot of accounts slowing at once, more than the usual handful of troubled accounts would explain. Some of those customers are genuinely struggling. But others are simply optimizing.

The problem for financial leaders is that these two groups can look identical on an accounts receivable report showing invoices sorted by days past due.

Why Misreading Delinquency Drift Is an Expensive Financial Risk

Getting the readout on financial risk is critical, because the correct move for one group runs opposite to the correct move for the other. You wouldn’t reduce credit allocations for clients who are just optimizing their cash flow.

Treat a “strategic stretcher” like a distressed account, and you damage the relationship. A round of aggressive payment reminders or a sudden credit hold aimed at a customer who is healthy and just managing their liquidity can sour an account you spent years building and can push that account toward a competitor who handles the same situation better.

On the other hand, if you misread genuine financial deterioration as a benign stretch, you can do damage of a different kind. Every additional day customer invoices go unpaid is risk exposure that grows while your window to act narrows.

An aging report tells you that a payment is late, the same way a thermometer tells you someone has a fever. A high temperature doesn’t tell you whether you are looking at simply a head cold or something that needs intervention. It looks the same on your report either way, and the essential next step is working out which issue you are dealing with so you can respond appropriately.

Recognizing Financial Risk: Knowing Whether Customers are Actually Distressed or Not

Separating distressed accounts from the “strategic stretchers” comes down to reading intent, and the signals that uncover it are readily available in the data accounts receivable teams touch every day. They just sit a layer below the summary numbers your team looks at first.

• The behavior patterns of a “strategic stretcher” tend to be orderly. The customer moves from one consistent payment rhythm to another, slower but stable, and then holds there.
• Financial distress behaviors tend to be more erratic. The pattern erodes instead of resetting, with the gap between due date and payment widening month over month and partial payments appearing where full ones used to be.

The way a customer engages with your other AR processes reveals as much as the timing does, and AR automation technologies help expose this data. A healthy buyer managing cash will usually keep communicating, keep ordering, and keep disputes honest and specific. A customer in financial trouble often goes quiet, slows ordering or changes their payment method, and begins using disputes as a stalling device, raising vague objections that buy time. How they respond when your team reaches out is a signal of its own.

The “strategic stretcher” tends to acknowledge the situation plainly, because from their seat it is a rational financing choice and nothing to be ashamed of. The distressed account tends to avoid, deflect, or over-promise.

Any one of these signals can mislead AR teams, so high-performing credit and collections teams read them as unified dataset. What separates the customer who is optimizing from the one who is failing is already in the financial data systems that generate the aging report. You just have to look past the top-line number and examine how the buyer is actually behaving.

Managing Slow-Paying Customers of All Types

Once you can tell the two groups apart, you can actually choose how to respond instead of running the same play on every late account.

• For the customer stretching payment due dates by design, the conversation shifts from collections to commercial terms. If a healthy buyer is going to use your terms as financing, that financing can be priced. An early payment discount gives them a reason to accelerate when it suits them. Or you write the longer terms down, agree to them in the open, and price them where it makes sense, so an informal drift becomes something you can plan around. Either way the customer stays, and you stop floating their financial position free of cost.
• For the customer showing real signs of deterioration, the same read tells you to move while you still have room. Tightening a limit, requiring partial payment before new orders, or simply prioritizing that account for senior attention is far more effective early, when the signals first diverge from the strategic pattern, than after the balance has slipped into the high-risk buckets everyone already watches.

It also helps to put a slower paying account in context. Look at how the rest of its industry is paying, and how that customer has paid you before. Blending internal and external data turns a hunch into a call you can stand behind. A customer falling behind at the same time as its whole industry is a different story from one falling behind alone. The good news is, accessing this data is simple with a platform built for AR efficiency.

Slower Payments are Altering AR Team Responsibilities

Today’s trends have changed the expectations asked of credit and collections professionals. The skill that matters most now has less to do with collecting faster or holding firmer on terms and more to do with accurately reading what a customer’s behavior actually means and matching the right response to the cause.

That readout and the response are the most important decisions anyone in finance makes right now. Done well, it protects margin from customers who would happily finance themselves on your balance sheet indefinitely, and it protects valuable relationships from being treated like risks they are not. The aging report will keep flagging the same late payment delinquencies it always has. The difference now comes down to one habit: whether your team treats that flag as the end of the work or the moment the real work starts.

Ready to rethink how your credit and collections teams manage financial risk? See how Billtrust’s cash generation platform works and talk to an expert for a free consultation.