Finance Managers: Make the Best Accounts Receivable Analysis to Grow your SaaS Business.
Clémentine d'Arjuzon
Jun 21, 2022
Your accounts receivable are the invoices that are yet to be paid by your clients. If your SaaS makes credit sales, you have some type of A/R. By extension, it also designs the process of collecting your invoices.
A/R are a crucial element of your financial health. Because they influence your cash flow, they can end up threatening your company’s liquidity if not enough are collected on time.
While it is tempting to glance at your accounts receivable total and call it a day, there is so much more to your A/R! Your DSO, CEI, aging report and turnover ratio will give you important insights about your company’s accounts receivable quality.
To make the best analysis, you also need to make sure that the data you use is accurate. With the proper tools, you can also get more in-depth analysis to foster your long-term growth.
Keep reading to find out how exactly!
Did you know? Upflow is an A/R software that helps you get paid faster. Providing handy A/R features, our analytics features give you the insights you need, when you need them, so you can focus on planning for your growth.
Why is Accounts Receivables Analysis Important for SaaS?
Accounts Receivables Influence Your Cash Flow.
Selling by credit is still selling: you need to get paid eventually.
If you let unpaid invoices accumulate, then insufficient amounts of cash come onto your company’s bank account. What is not collected can turn into bad debts, i.e. the invoices that never get paid.
Ultimately, that would get you late to pay your accounts payable, slow down your scaling process, and even pose a serious risk of bankruptcy.
You always can do a write-off of your bad debts (or doubtful accounts) using a contra asset account. This way, they’ll come out as an expense on your income statement. But it’s better to be proactive about your invoices in the first place!
Getting paid on time, that is to say, according to your payment terms, is key for your business to run smoothly. It allows you to cover both your working capital needs and your investments. More than that, it means you can make accurate cash flow forecasts and plan for your future growth.
Accounts Receivable for SaaS.
That’s also the case when you run a subscription business. Even though your clients are supposed to pay you regularly (monthly, quarterly, yearly, etc.), they might not. Some of them might be late payers, others will have changed payment methods during the period… Honing in on your precise data is how you’ll be able to optimize your processes.
SaaS especially need to stay up-to-date with their financial data. They evolve in a fast-paced context and tend to offer a wide variety of offers with different payment terms. Knowing what offer works best and how fast they collect their revenue from each stream is essential to not only survive but thrive.
SaaS: Which A/R Metrics Should You Track?
Before getting into how to best analyze your A/R, let’s look at a few essential KPIs to track.
Each highlights a different part of your receivable process. Together, they give you a broad understanding of your company and give you insights into what needs to be optimized to keep growing.
Need help tracking your KPIs? Have a look at our free spreadsheet!
DSO Analysis.
Saas: Why does your DSO Matter?
Your DSO (for Days Sales Outstanding) is the number of days it takes on average to get paid by your clients. This number should be as close to your payment terms as possible: 0 if you expect an immediate payment, 30 if your invoices' due date is a month after they’ve been issued, etc.
A low DSO means your business runs smoothly, your clients are happy (happy clients tend to pay on time), and your cash flow is predictable.
If it’s much higher than your payment terms, however, it can threaten your liquidity. A high DSO is a sign to review your credit policies and set up a strategy to course-correct. Find 5 essential steps to reduce your DSO here.
How to Calculate your DSO for SaaS Businesses.
You have two ways to calculate your days sales outstanding:
The simple method: you take your Accounts Receivable at the end of your period and divide it by your Gross Sales on the same period. Multiply your result by the number of days in your period.
This is the most straightforward, but also the least accurate way to calculate your DSO. The most accurate way to calculate your DSO is using the other method.
The countback method: this method requires you to go back in time to find out how long it’s taken you to get paid (hence the name).
You start with your receivable balance and your gross sales from your company’s balance sheet. From there, you go back month-by-month:
If your A/R is higher than your gross sales, you just add the number of days from the period to your DSO (which starts at 0).
If your A/R is lower than your gross sales, you calculate a day sales outstanding ratio. To do that, you need to divide your gross sales by your A/R. You then multiply this result by the number of days in your month (or period). This ratio gets added to your DSO.
Once you’re done going back in time, you have your total days sales outstanding. You can find a step-by-step guide to calculating your DSO here (with examples).
If you're you having trouble calculating your DSO, check out our free spreadsheet to calculate, interpret and improve it!
The best way to calculate your DSO and track it easily is to use a tool like Upflow! We use the most accurate method to compute it, as well as your latest data.
Accounts Receivable Aging Report.
What is an Aging Report Analysis?
An Aging Report is a visual representation of your pending invoices split into different categories, depending on their due date. They usually have: 0-30 days, 31 to 60 days, 61 to 90 days, and +90 days categories.
At a glance, you can see which category is piling up and take the necessary action to prevent a cash crunch.
Doing an aging report analysis means looking into each category and seeing where a problem is or may arise. It helps you prioritize your collectible efforts.
For example, the +90 days category has a high risk of turning into uncollectible invoices (bad debts), so you can take action on this but also on the previous category. The 61 to 90 days bucket is the one to carefully watch, as it can indicate a future cash flow problem.
How to Create a Receivable Aging Report?
To create your own receivable aging report, you’ll need to know your invoices' due date, as well as the contact they were sent to. In theory, it’s pretty easy, as you simply have to allocate each invoice to the relevant time bracket category.
Concretely, as a growing SaaS business, it would take you a lot of time to
List all the invoices you have pending;
Manually move invoices from one category to another as time goes on.
The best way to get a receivable aging report is therefore to use automated software that will do it for you. It might be a feature your billing or accounting software offers.
You can also use a tool like Upflow of course: as a specialized A/R software, our tool is literally built for this! Our Analytics functionality allows you to follow the various A/R metrics you need to track.
CEI Analysis.
What is your Collection Index Effectiveness?
Your Collection Index Effectiveness (or CEI) measures how much of your accounts receivable was indeed collected over a period of time. It’s a great metric to track alongside your DSO, which doesn’t take into account your payments due dates nor amounts.
In other words, your CEI shows the effectiveness of your collection process over a collection period. It is a percentage, so you should aim at getting close to 100% - and always stay above 80%.
SaaS: How to Calculate your CEI?
Getting to your CEI manually can be tiresome. You need some information from your balance sheet to use the following formula:
CEI = Beginning Receivables + Monthly Credit Sales - Ending TotalReceivable) / Beginning Receivables + Monthly Credit Sales - Ending Current Receivable) * 100
Alternatively, you can download our free spreadsheet CEI calculator.
A/R Turnover Ratio Analysis.
What does Your Accounts Receivable Turnover Ratio say about your SaaS?
Your accounts receivable turnover ratio lets you know how well you collect money from your customers. It shows your average collection period for the credit you have extended to your customers.
You want to get a high receivables turnover ratio as it suggests a good collection process. Your clients are paying quickly for the services you provide and your payment and receivables processes are efficient.
In difficult economic times, however, you might want to consider settling for a lower turnover ratio. That means extending longer credit times, which can be useful to specific customers who are struggling financially. It’s a good way to keep your customers in time of crisis. Credit risks need to be pondered with the reality your SaaS is facing.
How to Calculate Your Accounts Receivable Turnover Ratio.
To obtain your A/R turnover ratio, you need to do an average accounts receivable to net sales ratio over a period of time.
A/R Turnover Ratio = Average Accounts Receivable / Net Sales.
From there, you can get your average collection period. Simply divide the number of days in the period you chose (365 days, 30 days, etc.) by your turnover ratio.
The Best Way to Analyze Your Accounts Receivables.
Now we’ve seen what to analyze, let’s look into the best way to assess your A/R. Better A/R means better insights about your company, which means better financial forecasting.
If you know that your DSO is a bit high for example, you can take action to lower it, which will in turn help you with your cash flow. In turn, it means more liquidity to dedicate to your long-term projects.
Focus on Quality Data.
If you want to have high quality A/R analysis, you need high quality data. It sounds simple enough, but it can get complicated quickly.
Make sure your data is up-to-date.
When you have hundreds (or thousands!) of clients and as many invoices to follow, getting a hold of qualitative data can turn into a full-time job.
For one, this data needs to be accurate. There is little point in tracking KPIs that aren’t up to date. Making sure the data you use to make your decisions and create your financial reports is the latest one available is key. That ensures your actions are aligned with your strategic goals.
To do that, you can establish one source of truth when it comes to your financial numbers. Spreadsheets are an option, but they don’t update automatically so they’re not the most efficient. Software on the other hand runs that for you in the background.
Pick the software that, connected with all your finance tech stack, will centralize your latest data. Bonus point if said data is updated in real-time, and not just once or twice a day.
Use the most accurate formulas.
You need to make sure the formulas used to calculate your KPIs are the most accurate ones. Like we saw with the DSO, there are usually several ways to compute the same metric.
When it comes to financial numbers (and financial statements), we know that accuracy is quintessential. That’s why using softwares specialized in A/R ensures you have the right calculations and results. They also help streamline your whole process - more on that below.
Optimize Your A/R Process.
The best way to analyze your A/R is to make sure your A/R process is efficient in the first place. If your receivable process is “up in the air”, with invoices floating around and no real workflow, it will be difficult to analyze your data and plan for your growth.
One because your data wouldn’t be accurate, two because it’s difficult to plan without reliable processes. So if you want to make the best decisions, based on the best A/R analytics, you need to spend some time fine-tuning your process.
Take a moment to think about your accounts receivable process at this point in time.
Consider both aspects:
With your clients, from the moment an invoice is issued to the moment it’s paid (including follow-ups in case of late payment).
Within your company, how you collaborate and stay on top of your A/R.
Now think about how you could make these processes more efficient. Here are a few pointers to get you started:
Make it a priority: if collecting your unpaid invoices is a priority for your company, it will become a priority for your clients, too.
Map out processes and responsibilities: everyone should know what to do, who needs to do it and when to do it. Mapping out your receivable process (that means invoicing, payment and collection) will make a huge difference already.
Set up reminders: schedule time to go over your A/R metrics, but also to decide on a few key actions for the period. Let your team know about your priorities and encourage them to block some time off for that, too.
Allocate resources: you and your team need time and tools in order to optimize your A/R process. Luckily, using a software like Upflow will help you save time, so you can all focus on tasks that make a real difference.
Communicate with your sales team: they’re the ones selling, and you’re the ones collecting. Which means you get a lot of product feedback, and they get feedback on your payment terms and credit policies. Working more closely means making sure you’re all on the same page and offering better services to your clients. Which in turns, means more clients! Win-win-win.
Automate your A/R.
When Spreadsheets aren’t Enough.
While it is impossible to work in Finance and not use Excel, they are not the end-all-be-all of this department. When it comes to calculating ever-moving data, and tracking financial KPIs, they simply don’t make the cut.
Using spreadsheets requires switching between a lot of tabs, and chasing the right info everywhere. If you want more details about the CEI you just calculated for instance, you need to open at least a few other files to know what exactly went on during this period in time.
In short, spreadsheets are a nightmare to keep updated, and require you to switch between different sources.
Using Billing and Accounting Software for A/R Analysis.
Billing and accounts software are essential, there is no debating that. They help you send invoices, receive payment, and track that everything is where it should be. And of course, make sure you provide state of the art financial statements.
While they’re amazing for this job, they are not so good when it comes to accounts receivable. Some might offer a few analytics features, but none has a financial dashboard with the width and depth you need for your A/R metrics.
Besides, they only display A/R information. They don’t let you do anything about it from their software, which means you’re back to juggling different tools to track one complete process.
The Best Option for SaaS: A/R automation.
A/R software is the best thing you can do to optimize your receivable process. Not only is it the most efficient way to gather the information you need, but it frees up your time, too.
Automating tasks that have low-value (like sending the same payment reminders emails) means more time to work on what really matters (like establishing a strategy for the invoices piling up in your aging report).
Upflow has many features you can use that will make your life easier, and your company grow better:
Automatic email reminders: personalized to your recipients.
Internal reminders for your team: always remember when to follow-up
Unlimited team members so you can include your sales team in the process
Analytics features to track your KPIs easily with a great level of details.
Payment options: we offer various payment currencies, methods and terms depending on your business.
All in all, Upflow makes it easy for you to be paid. It’s an integrated solution that helps you with all A/R related tasks, from payment to follow-up. It centralizes the data you need in real-time and offers financial forecasts you can use to make the best strategic decisions.
Key Takeaways:
Your Accounts Receivable tell a story about your company. Are your clients happy? Are they paying on time? Is your business thriving?
Monitoring your A/R is especially important if you’re a SaaS with a subscription-based business. Looking into the reality of when your clients pay you will make a big difference in your business’ future.
We recommend tracking (at the very least) your DSO, CEI, Aging Report and Turnover ratio. They all highlight a different part of your collection process and, together, paint an accurate picture of your process as a whole.
The best way to analyze your A/R is to make sure you have quality data, as well as allocate resources to actually do the analysis. Only then can you begin to optimize your process.
Reviewing your A/R process regularly ensures you get the best data to base your analysis on. You can then decide on priorities aligned and supportive of your business’ growth goals.
Using specialized A/R software like Upflow helps you get the best analytics and accurately plan for your future growth.
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