In my experience, a lot of business owners get into trouble because they think they’re making money when they’re really not.
It’s easy for this to happen.
For example, let’s say you look at your P&L and it shows a profit.
That might seem great, but you could still be losing cash.
You could have debt or unpaid taxes.
You could be making loan payments where only the interest shows up on your P&L—while thousands of dollars in principal payments are draining your cash.
Your P&L can trip you up because it doesn’t show you the big picture (i.e., it doesn’t tell you if you’ve paid your sales tax).
That’s why you need more than just a P&L to know if you’re making money.
And it’s not enough to rely on your bank balance to tell you how your business is doing.
The four reports you should pay attention to
You need to understand your profit and loss statement, your cash flow statement, your balance sheet, and your AR aging report.
Here’s what each report means:
- P&L: Shows your income and expenses
- Cash flow statement: Shows how much cash is coming in and how much is flowing out and what’s the net difference (i.e., if it’s positive or negative)
- Balance sheet: Shows what you own (Assets) and what you owe (Liabilities)
- AR aging report: Shows how much each client owes and how long each of their invoices has been outstanding
The only way to know what’s really going on in your business is to look at and understand all four of these.
With the balance sheet, it’s especially important you understand the outstanding accounts receivable (AR) amount that it lists.
Understanding your accounts receivable
Your AR is money that’s been earned but hasn’t come in yet.
So, when you invoice a client and you give them net 30 terms, you’re booking it as revenue, but the client may not pay you until later.
That money is your accounts receivable.
If you look at your balance sheet, you’ll see your total amount of AR that’s outstanding.
A lot of business owners aren’t paying attention to this.
But it’s important to manage your AR.
You need to know who has paid and who hasn’t.
You need to know how much money is overdue and how long it has been overdue.
Otherwise, you may not have the money you need to pay your bills.
So, you can get into a lot of trouble with this if you’re not paying attention.
Managing your accounts receivable with an AR aging report
I help my clients stay on track with their AR by managing it for them.
For instance, one of my clients is a consulting firm that has a million dollars in AR at any given time.
So, we manage the AR by looking at it on a weekly basis, reviewing the AR aging report to see what each client has outstanding and what is overdue.
This report lets us see each outstanding invoice.
If one of their clients is past due on their payment, we send a gentle reminder.
Before I send a reminder on behalf of my clients, I look at:
- How late is the payment
- What does their client’s payment history look like (in other words, do they normally pay on time)
You don’t want to rile up your clients by sending them a lot of payment reminders, so use the appropriate amount of grace.
For example, if your customer hasn’t paid on time, it could be that they didn’t receive the invoice because of a problem with how you set it up in the system.
Your business needs to decide what constitutes a “late payment”; it could be one day, or it could be two months.
Keep in mind that the longer you let an unpaid invoice go, the harder it is to get your money.
So, if you’re owed $30k from six months ago, it’s going to be more difficult to collect, because of the time that has elapsed since the services were rendered.
The client may view this as an unexpected payment and have questions. This is unnecessary noise that will take time away from effectively managing your business.
Checking your AR aging report regularly can help you avoid that situation.
Staying up-to-date on your reports
Looking at the AR aging report is an important piece of the puzzle. But to get the full picture of your business’s health, it’s important to understand and manage all four of the reports I discussed in this article.
If you want help doing this, let my team and I know.
We’ll help you stay-up-to-date on with your financial reporting, so you can know if your business is actually profitable and more importantly, cash flow positive at any given time.
Schedule a consultation with us today by clicking the button in the top-right corner.
