Red Flags in AR and AP That Could Signal Financial Trouble

Accounts Receivable (AR) and Accounts Payable (AP) may not be the flashiest parts of your financials, but they’re often the most telling. Think of them as your business’s pulse—steady movement means healthy cash flow, but erratic spikes or delays? That’s when it’s time to pay closer attention.

Whether you're a small business owner, a finance manager, or a founder wearing multiple hats, spotting early red flags in your AR and AP can help you avoid bigger problems down the road. Here's what to look for—and what to do about it.

🚩 Red Flags in Accounts Receivable (AR)

Your AR shows how much money customers owe you. In theory, it’s revenue you’ve earned. In practice? It’s cash you don’t have in hand yet. That makes managing AR a balancing act—and a warning system.

1. Rising Days Sales Outstanding (DSO)

If it’s taking longer and longer to collect payments, that’s a major red flag. A rising DSO can indicate customer dissatisfaction, weak credit policies, or ineffective collections processes.

🔍 Why it matters: The longer it takes to collect, the tighter your cash flow—and the harder it becomes to cover your own expenses.

What to watch:

• DSO trending up over several months

• A handful of clients contributing to the majority of overdue balances

• Frequent extensions or excuses from customers

2. High Percentage of Overdue Invoices

A growing pile of 60- or 90-day past-due invoices suggests that clients are either struggling—or simply not taking your payment terms seriously.

💡 Tip: Consistent enforcement of credit policies, timely follow-ups, and clear payment expectations go a long way.

3. Large Customer Concentration

If most of your AR is tied up with just one or two customers, you’re overly dependent. If they delay payments (or disappear), you could be in trouble fast.

🧠 Mitigation strategy: Diversify your customer base and assess credit risk regularly.

🚩 Red Flags in Accounts Payable (AP)

On the flip side, AP reflects what your business owes others—vendors, suppliers, service providers. While delays can sometimes buy you time, persistent issues often signal liquidity concerns or operational inefficiencies.

1. Consistent Late Payments to Vendors

If your team is chronically paying bills late—or missing due dates altogether—it may point to a cash shortfall or disorganized payment processes.

🧾 Why it matters: Late payments can damage vendor relationships, hurt your credit terms, and even interrupt supply chains.

2. Rising Days Payable Outstanding (DPO)

Stretching out payables can temporarily improve cash flow, but if DPO increases significantly without a strategic reason, it might mean you're struggling to cover short-term obligations.

What to watch:

• Vendors sending multiple reminders

• Late fees appearing on invoices

• Suppliers moving you to prepay or COD (cash on delivery)

3. Using Credit Cards or Loans to Pay Routine Bills

If you're financing everyday expenses with borrowed money, that’s a blinking neon sign that your working capital isn’t where it should be.

🚨 Red flag: Short-term fixes being used for long-term problems.

Why These Red Flags Matter

Left unchecked, AR and AP issues can quickly spiral into broader financial instability. You might find yourself:

• Short on cash to pay payroll or taxes

• Hurting relationships with key suppliers

• Facing higher financing costs due to damaged credit

• Losing negotiating power with both customers and vendors

In worst-case scenarios, AR and AP mismanagement is one of the earliest indicators of insolvency risk—when your liabilities begin to outpace your liquid assets.

What You Can Do Today

✅ Run regular AR and AP aging reportsDon’t wait for your year-end review. Monthly (or even bi-weekly) reports help you stay proactive.

✅ Establish clear payment terms—and enforce themConsistency builds both credibility and reliability.

✅ Monitor cash flow forecastsIf collections slow down or payables pile up, your forecast will reflect the pressure early.

✅ Communicate with customers and vendorsIf there's a hiccup, transparency often goes further than silence. Most partners prefer honesty over surprises.

Final Thoughts

A healthy business isn’t just about top-line growth—it’s about how well you manage the money flowing in and out. AR and AP are two sides of the same financial coin, and they often give you the first signs of stress or opportunity.

By spotting red flags early and addressing them head-on, you not only protect your business—you strengthen it.

Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. For guidance specific to your situation, consult a qualified accountant or financial advisor.