Debtors and Creditors Reports: What Every Business Owner Should Know
There are some accounting reports that sound considerably more complicated than they actually are. Aged Debtors and Aged Creditors are perfect examples. They may sound like reports destined to be opened once a year by your bookkeeper, stared at thoughtfully for a few minutes and then filed away somewhere. In reality, they're two of the most useful reports available to a business owner. Why? Because your bank balance tells you how much cash you have today. Your Profit & Loss tells you how the business has performed but your debtors and creditors reports can help you understand what might be coming in, what needs to go out and where problems could be developing.
That's information worth having.
What are debtors and creditors reports?
Let's remove the accounting terminology.
Debtors are people or businesses that owe you money. You've invoiced a customer, but they haven't paid you yet.
Creditors are people or businesses you owe money to. You've received goods or services from a supplier, they've invoiced you, and you haven't paid them yet.
Depending on your accounting system, you might see these reports called:
Aged Debtors / Aged Receivables / Accounts Receivable
and
Aged Creditors / Aged Payables / Accounts Payable.
Different names. Same basic idea. The word “aged” is important. These reports don't simply tell you how much is outstanding. They tell you how long it has been outstanding.
Why does the age matter?
Let's say your debtors report shows £45,000 owed by customers. That sounds pretty good. There's £45,000 coming in, right? Not necessarily. We need to know more.
An aged debtors report will normally divide outstanding invoices into periods such as current, 30 days, 60 days and 90+ days. If most of that £45,000 relates to invoices you've raised this month that aren't due yet, that's one thing. If £18,000 has been outstanding for more than 90 days, that's quite another.
An invoice isn't a fine wine. It doesn't become more valuable with age. In fact, generally, the older a debt becomes, the more attention it deserves. The 90+ days column shouldn't become a retirement home where old invoices go to live out their remaining years in peace. Someone needs to find out why they haven't been paid.
Profit isn't the same as cash
This is where debtors become particularly important. Imagine your Profit & Loss says your business has made a £50,000 profit. Fantastic.
But perhaps £40,000 of the sales contributing to that profit haven't actually been paid yet.
You can be profitable on paper and still struggle to pay the bills. Your staff won't be particularly impressed if you explain "We don't have enough money to pay wages this month, but don't worry—the Profit & Loss looks fabulous."
Profit matters. Cash matters. They aren't the same thing. A healthy business needs to understand both.
Let's look at a business
Imagine a small business with:
Amount | |
Bank balance | £20,000 |
Debtors | £45,000 |
Creditors | £25,000 |
At first glance, that doesn't look particularly concerning. There's £20,000 in the bank, another £45,000 owed by customers and £25,000 owed to suppliers.
Let's look a little closer. Of the £45,000 debtors, £18,000 is more than 90 days overdue. Worse still, £15,000 of that belongs to one customer. Suddenly, saying “We've got £45,000 coming in” feels rather optimistic. You've got £45,000 recorded as being owed to you. That's not necessarily the same thing.
Now let's look at the creditors. Of the £25,000 owed to suppliers, £10,000 is already overdue and £8,000 is owed to one supplier that the business relies heavily upon. And then somebody remembers there are several supplier invoices sitting in an email inbox that haven't been sent to the bookkeeper yet. Our three headline numbers haven't changed. But our understanding of the business certainly has. That's the value of these reports.
Your debtors report is also a detective tool
An old debtor balance doesn't always mean a customer hasn't paid. Sometimes they have paid. The problem might be that the payment hasn't been correctly matched against the invoice or perhaps there's:
a duplicate invoice;
an unapplied credit note;
a payment sitting on account;
an overpayment;
an invoice raised to the wrong customer; or
an old balance that simply hasn't been investigated.
This is why reviewing the report matters. If Mrs Smith supposedly owes you £500 from 18 months ago, don't just accept that because the computer says so. Find out why.
The same applies to negative balances. A negative debtor or creditor balance isn't necessarily wrong. There may be a perfectly legitimate reason for it, such as an overpayment or credit note but it should be understood. “It's a minus, so presumably that's good” isn't quite the level of financial analysis we're aiming for.
Then there's credit control
If the report confirms that customers genuinely haven't paid, you need to do something with that information. This starts long before an invoice becomes overdue. Clear payment terms matter. If your agreed terms are 14 days, an invoice sitting in the 60-day column shouldn't quietly become normal. Regular reminders, statements, phone calls and a consistent process can all form part of effective credit control.
We've previously written a full guide to effective credit control and keeping your cash flow healthy, covering payment terms, reminders, automation and structured follow-ups in much more detail.
The important point here is that your aged debtors report tells you where your attention is needed.
Watch for concentration too
There's another risk hidden within the numbers. Go back to our fictional business. It has £45,000 in debtors but £15,000 of the seriously overdue debt belongs to one customer. That's useful information.
The overall debtor figure might look perfectly reasonable, but if a significant proportion is concentrated with one customer, problems with that customer could have a disproportionate effect on your cash flow.
The same principle applies to suppliers. If a large amount of your creditor balance relates to one supplier that's essential to your operation, you probably don't want the first conversation about your overdue account to happen when they put you on stop. Headline figures only tell part of the story.
Creditors deserve just as much attention
Businesses naturally pay attention to people who owe them money. Your aged creditors report is equally important. It tells you what your business owes to suppliers and helps you understand what needs paying and when. That matters for cash-flow planning and it matters for relationships. Small business owners quite rightly get frustrated when customers don't pay them according to agreed terms. It's worth remembering that your suppliers may be small businesses dealing with exactly the same pressures. If someone has supplied the goods or services they agreed to provide, paying them according to the agreed terms should be a priority.
A large 90+ day creditor balance isn't something to celebrate because you've successfully kept the money in your bank account for longer. It could indicate cash-flow difficulties, disputed invoices, poor processes or simply bills that have been missed. Eventually, it can damage valuable supplier relationships.
Your report is only as good as the bookkeeping behind it
This is a big one. Imagine your creditors report says you owe suppliers £5,000. You've got £20,000 in the bank. Lovely!... Except there are £12,000 of supplier invoices sitting in inboxes, on desks and possibly underneath somebody's coffee cup that haven't made it into the bookkeeping yet. You don't really owe £5,000. Your report simply only knows about £5,000.
For debtors and creditors reports to be useful management tools, the bookkeeping behind them needs to be accurate and up to date.
Supplier invoices need entering promptly.
Customer invoices need raising.
Payments need allocating.
Credit notes need processing.
Old balances need investigating.
Otherwise, you may be making business decisions using information that's incomplete.
What about really old debts?
Old balances shouldn't simply sit on reports forever because nobody knows what to do with them.
On the debtor side, sometimes a customer genuinely isn't going to pay. At that point, you may need to consider whether the debt should be written off. If you're VAT registered, there can also be VAT considerations when debts become bad. HMRC's Bad Debt Relief rules can potentially allow VAT previously accounted for on qualifying unpaid supplies to be reclaimed once the relevant conditions are met, including the debt generally being at least six months old. This is something to deal with properly rather than simply deleting an invoice because you're tired of looking at it.
Similarly, very old creditor balances need investigating. Do you genuinely still owe the money? Was it paid and never allocated? Was there a credit note? Is the balance disputed? The answer isn't necessarily obvious from the report alone.
Look at debtors and creditors together
This is where these reports become really powerful. Don't think of them as two isolated lists. Together, they're helping you answer some pretty fundamental questions:
What's likely to come into the business?
What's going to need paying?
When?
Is there likely to be a gap between the two?
Perhaps you have £30,000 due from customers over the next month. Great. If £25,000 of supplier bills fall due next week and most of your customers historically pay late, that timing matters. Likewise, a healthy bank balance can create false confidence if a large amount needs to leave the account shortly and that's before we consider other commitments such as wages, PAYE, VAT, loan repayments and tax. Suddenly, the £20,000 sitting in the bank isn't quite as available as it first appeared.
Don't save these reports for year-end
Aged debtors and creditors reports aren't simply something your accountant needs to tidy up before preparing the year-end accounts. They're management reports, there to help you run your business.
For many small businesses, I'd suggest reviewing debtors at least weekly. It doesn't have to become an enormous financial meeting involving PowerPoint presentations, pie charts and somebody pointing dramatically at a graph. Five or ten minutes can be incredibly useful.
Look at what's outstanding.
What's overdue?
What's moved into an older column?
Is there anything unexpected?
Are there balances you don't understand?
Does anyone need chasing?
Then look at creditors.
What's due?
What needs paying this week?
Are any suppliers overdue?
Are there any unusual balances?
Does everything you know about actually appear on the report?
A regular habit makes problems much easier to spot.
Who is responsible for actually chasing the money?
This is worth clarifying too. Your bookkeeper may keep the records accurate, allocate customer receipts, investigate balances and provide reliable debtor reports. That doesn't necessarily mean they're responsible for credit control. Some bookkeeping services include credit control and actively chase outstanding invoices. Others don't.
Someone within the business needs clear responsibility for taking the information on the report and doing something with it because producing an immaculate aged debtors report every Friday and then watching the same £10,000 invoice move serenely from 30 days to 60 days to 90+ isn't particularly helpful. The report is the information. The value comes from what you do with it.
Two reports worth getting to know
Accounting software can produce an enormous number of reports. You don't need to become an accountant or understand every one of them to run a successful business but aged debtors and aged creditors are two I think every business owner should understand.
They can help you spot cash-flow problems earlier.
They highlight customers who aren't paying.
They show bills approaching their due dates.
They expose strange balances that need investigating.
They help you protect customer and supplier relationships.
Used together with your bank balance and Profit & Loss, they give you a much more rounded view of what's actually happening financially.
So this week, don't just look at the number in your bank account.
Run your aged debtors report.
Run your aged creditors report.
And actually look at them.
You might find everything is exactly as you expected. You might also find a few things that make you say “Why on earth is THAT still there?” That's precisely why the reports are worth reviewing. Your bank balance tells you where you are today. Your Profit & Loss tells you how the business has performed. Your debtors and creditors reports help you see what might be heading your way next.
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