by Hugh Johnson, Posted on 8/15/2018 1:41:10 PM
A number speaks for itself. Like, you get a basic scenario of your performance by just looking at the number. Hence, in our Accounts Receivable solution we have added a multi-row card with few important numbers. This card has an aggregate of the outstanding amount, overdue amount, the percentage of overdue to outstanding and days sales outstanding. A detailed analysis is good when you want to plan and evaluate your cash flow needs but it is good to know the numbers as you will get understanding of your receivables performance by just taking a glimpse at these figures.
Outstanding and overdue are two different concepts. The outstanding amount is the unpaid due as of a particular date. It is the debt owed to business and treated as a current asset because of its time-bound nature.
Overdue is the unpaid amount which has passed the due date, based on the credit terms of the invoice.
From a business point of view, knowing the outstanding amount will tell you exactly how much money we can expect to come in to the business from trade debtors.
An ideal, but often unattainable, customer credit policy may be designed in such a way that your accounts payable and accounts receivable coincide with each other. This will help to avoid cash-flow difficulties, especially in periods of rapid sales growth. Having a high outstanding number can either be good as your sales are increasing or may just suggest that you are taking on too much risky business, providing credit to customers who cannot or will not pay at all or on time, leaving you with bad debts. It may also be a sign that you need to take more proactive action with your trade debtors in order to get paid sooner.
In the real world, not everyone pays on time and hence the overdue figure.
The overdue ratio is the percentage of overdue to outstanding. It can alert you on how efficiently your credit control and collections teams are working. Like for instance in this model, the outstanding amount is 736,890.58 and the overdue is 365,271.94. In the example the overdue ratio is 50%. It can be quite a useful single indicator of the quality of the current receivables. It should be looked at though against a context of sales activity. If we take an extreme case where the company is growing very quickly by supplying goods and services on credit to uncreditworthy customers then for a while this ratio will be suppressed and look artificially good. In the example model, our fictitious company is growing very quickly. In this context, the Overdue ratio of 50% is an alarming figure. This implies that the collection’s team must seriously chase the customers for the money.
To gain more insights about company’s inflow many prefer keeping track of their days sales outstanding (DSO). It is a very popular Key Performance Indicator (KPI), but like the Overdue Ratio it should also be interpreted against a context of recent sales activity.
By default, in the Suntico Accounts Receivable solution, these measures are summarized for the entire trade debtors ledger. In the report however, you can slice these by customer by clicking on a customer record in one of the other visualization in the report page.
Take a look at the interactive demo below. Try clicking different customer records and watch how these key numbers change. Try and interpret what is that telling you.
For example, if you select “5-way Hair Design” as a customer, you see that the Outstanding Ratio drops and the DSO figure increases. This is not too alarming and really indicates that there has been very recent sales activity with the customer.
Compare this with “3a Church Street” where both figures go up. Now this is alarming, as it means that we are letting a customer who has a very poor payment record with us take on more debt.
Why not try this free for a month with your own Sage 50 data?