AR As Bellwether: How Tracking Your Receivables Can Provide Insight into Today’s Economy

It’s never been more important – nor more difficult – to forecast your cash flow. A rise in tariffs, retaliatory trade wars, spiraling inflation, and fear of recession all make the task especially difficult. But AR is positioned perfectly to cut through the fog and provide clarity to the business.

Here’s five ways AR data can provide visibility:

1.      Capture Real-Time Insight into Customer Liquidity
AR teams are the first to see payment behavior. A spike in late payments or requests for extended terms often signals customers are facing cash flow issues. When you see clients paying late, it should be seen as a red flag for that industry’s financial stress.

2.      Leading Indicator of Actual Revenue
Revenue doesn’t convert into cash until the revenue is received and applied. AR is on the front lines of this battle: Proactive receivables leaders should be aggressively tracking if customers are paying – and how quickly. Any worsening in your DSO (or better yet, “Best Possible DSO”) means you are struggling to convert sales into cash, which impacts working capital and can signal a downturn.

3.      Sensitivity to Shifts in Economic Confidence

When the economy tightens, companies often delay paying their bills to conserve cash. AR sees this pause almost immediately. Delays in payments across industries often foreshadow a broad economic slowdown or even recession long before GDP numbers catch up.

4.      Credit Risk Is a Leading Indicator of Deepening Financial Trouble
Customer defaults, bankruptcies, or restructurings hit AR’s radar first. Rising bad debt reserves or write-offs are early signs of an economic slowdown within a client company or across an entire industry.

5.      AR Data Can Shine A Light on Supply Chain Health
Changes in payment patterns are often tied to upstream issues—inventory build-up, order cancellations, or margin pressure. Far before any quarterly earnings report, a retailer’s delay in payments to suppliers could signal declining consumer demand.

Which industries are likely to be stressed first?

History tells us that four industry clusters are likely to be among the first to feel the impact of the economy. Given their record, here’s what you should do about it:

Manufacturing & Construction: Consider stricter credit evaluations and securing collateral to mitigate default risks to offset economic fluctuations.

Retail & Consumer Goods: Monitor consumer spending trends closely and selectively offer flexible credit terms. Only prioritize customers with solid payment records.

Healthcare: Recognize the inherently extended payment cycles by exploring alternative financing solutions (such as factoring), to avoid imposing overly-stringent credit terms.

Technology: While the sector may exhibit resilience, exercise caution with startups or firms exhibiting high burn rates. Adjust credit terms to reflect each business’ unique financial stability.

What else should AR implement to protect receivables:

Implement Regular Credit Policy Reviews: This is not the time to rest on your laurels or assume a client that has always paid on time will continue to. Continuously assess and update credit policies to reflect current economic conditions and customer creditworthiness.

Segment Customers by Risk: Categorize customers based on their financial health and payment histories. Adjust credit terms to mitigate potential risks.

Utilize Credit Scoring and Industry Benchmarks: Apply the data you’re collecting to inform credit decisions on customers you may know less about. (If one manufacturing client is starting to pay late, there’s no reason to assume it is – or will remain – an isolated customer challenge.)

Adjust Payment Terms: For higher-risk clients, consider implementing shorter payment cycles, requiring partial upfront payments to safeguard your cash flow.

In the end, the best-performing AR teams will be those that proactively address their cash flow and don’t wait for problems to build. Use your insights to inform your decision making, inside and outside of AR.