When advisors look at accounts receivable, the first question is almost always about cash — how quickly is the business collecting, and is there a timing problem. That's a real and important question.
But receivables tell you more than just how the cash is flowing. They tell you something about the quality of the customer base, the effectiveness of the billing process, the health of the individual customer relationships, and sometimes whether the business is telling itself a story about its revenue that isn't entirely accurate.
Knowing how to read the aging report — not just the balance — makes you a more useful advisor.
Days Sales Outstanding: The Starting Point
Days sales outstanding (DSO) is the baseline calculation: total accounts receivable divided by average daily revenue. It tells you, roughly, how many days of revenue the business is carrying in uncollected invoices.
Industry context matters here. A professional services firm with Net 30 terms should have a DSO somewhere in the 35 to 45 day range — slower than the terms, but not dramatically so. A contractor billing on a payment draw schedule might run 50 to 60 days without that being problematic. A distributor might legitimately have 45 day terms with customers who pay at 55 days. The question isn't whether DSO is above 30; it's whether it's appropriate for the business model and the industry.
When DSO is significantly elevated above what the terms and the industry would suggest, there's a reason. Finding it is the job.
The Aging Report as a Diagnostic Tool
A summary AR balance doesn't tell you much. The aging report — which breaks receivables into buckets by how long they've been outstanding — tells you a lot.
A healthy aging typically shows 70 to 80 percent of receivables in the current or 1-30 day bucket, with the older buckets declining sharply. When that pattern inverts — when a meaningful portion of receivables is sitting in the 60+ or 90+ bucket — you have a real problem to investigate.
Receivables over 90 days are often not receivable. This is the thing most owners haven't been told explicitly. A balance that's been sitting in the 90+ bucket for more than one reporting period is a collectibility question, not a timing question. Some of it may collect. Some of it likely won't. A business carrying significant 90+ day receivables without a reserve against them is overstating its current assets.
When I see a large 90+ balance on a new client's books, I ask for the underlying invoices and call details. Has anyone called the customer? Is there a dispute? Has the customer's business changed? Is the invoice legitimately unpaid, or has the customer signaled they're not paying and the business just hasn't written it off yet?
The answer tells me a lot about how the business is managing its customer relationships — and about how realistic the balance sheet assets actually are.
Concentration Is a Hidden Risk
A business that has five customers and one of them represents 60 percent of outstanding receivables has a concentration problem that the aging report alone won't show.
The summary balance might look fine. The aging might look fine. But if one customer is carrying that much of the receivable balance, the business has a single point of failure in its cash collection. A payment dispute, a slow-paying period, or worse — a customer who is heading toward financial trouble — can create an immediate cash crisis.
The question to ask: if you subtracted the three largest customer balances from the AR aging, what would the rest of the receivable portfolio look like? If the answer is "almost nothing," the concentration is real and it's worth discussing with the client.
What Receivables Tell You About Revenue Quality
This is the one most advisors miss.
Revenue that gets booked to the P&L but never collected is not real revenue. In accrual accounting, revenue is recognized when it's earned — which means it hits the income statement before the cash arrives. Under normal circumstances, that timing difference is fine; the cash follows. But when a business has a pattern of recognizing revenue and then carrying the receivable indefinitely, the income statement is overstating economic performance.
This shows up in a few patterns:
Receivables growing faster than revenue. If revenue grew 15% year over year but AR grew 30%, the business is either extending more credit, collecting more slowly, or recognizing revenue that isn't converting to cash. All three are worth understanding.
Consistent large year-end receivable balances that don't appear mid-year. A business that accelerates billings at year-end to hit revenue targets — and then carries those balances into the following year — may be timing revenue recognition in ways that inflate the appearance of the business.
Revenue that correlates with a single relationship. If a large portion of reported revenue is owed by a related party, an affiliate, or a customer with whom the owner has an unusual relationship, the receivable balance deserves scrutiny. I've seen businesses where a significant portion of the AR was owed by entities that were never going to pay — and the revenue was being recognized anyway.
A Practical Cadence
For most businesses in the $2 to $20 million range, reviewing the AR aging monthly — not quarterly — is the right cadence. The information changes quickly, and waiting 90 days to discover that a large balance has gone from current to 60 days past due means you've lost the most useful intervention window.
The review doesn't have to be long. Fifteen minutes with the aging report and a list of any balance over 60 days is usually enough to catch the things that matter. Is anything new in the 60+ bucket? Has anything moved from 60 to 90? Are the same customers always slow?
That pattern recognition, over time, tells you more about the health of the customer base than almost any other single piece of data.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to businesses from $1M to $50M in revenue. He works with business owners and their advisors on financial clarity, credit, and operational improvement.
jrbohlke.com • The Analysis