In what condition are your accounts receivable?
While your total accounts receivable number from your accounting system tells you the total amount of money owed by your firm’s clients, your accounts receivable report should be aged 30, 60 and 90+ days to give you greater information of the state of your receivables.
The 2008 Juris Law Firm Economic Survey from LexisNexis (the last date for which we have such a survey – they are no longer being published – a great loss as these surveys were very detailed and informative) shows that ‘days fees outstanding’ for accounts receivable in 2008 were 83 for all firms on average and ranged from 72 to 100 depending in which quartile the firm ranked. Those are a lot of days!! The economic conditions have worsened from 2008 and we would imagine that this statistic has eroded further as a result…
So why do an accounts receivable breakdown? It is useful to look at trends over time. How has the over 90+ category changed? Has it gone up? Growth in your accounts receivable – and particularly in your over 90 days category – can indicate poor client selection, poor collection practices, too much billable time put into a file relative to its worth, or a combination of all three.
Regardless, growth in your over 90+ day category should be examined closely to see if there is a cash flow crisis coming down the road.
Furthermore, you should be taking action – now! – on the accounts that have just moved from the under 30 day (ie current) category to the 30 to 60 day category. Those are the accounts that stand the greatest chance of success. Time spent there may make the difference between an account that is collected and one that is written off…
Accordingly, when you are doing your monthly financial ‘dashboard’ report, be sure to breakdown your accounts receivable in order to determine the action that you should be taking on managing your finances – now.