The Real Cost of Aged AR for a Trade Contractor

Most contractors look at their aging report and see a list of customers who owe them money. The actual cost of that aged AR runs deeper than the face value of the invoices. It compounds across cash flow, growth, and the cost of capital, and it shows up as a permanent drag on the business.

Here is the math most operators never run.

The Surface Cost

The surface cost is the dollars on the aging report. If you have $400,000 sitting in 60+ days, that looks like $400,000 of risk. It is not. The recoverable population is usually 50 to 70 percent of that, depending on customer mix and aging. So the real surface exposure on a $400,000 aged balance is something closer to $200,000 to $280,000 of money you should reasonably expect to collect if it is worked properly.

That number alone usually gets a contractor's attention. But the surface cost is the smallest part of the calculation.

The Cash Flow Cost

Aged AR is money you have already spent. You paid the labor, the materials, the subs, and the overhead to deliver that job. That cash is gone. The only way you get it back is when the customer pays. Until they pay, you are running the business on a credit line, on cash reserves, or on the next deposit from the next job.

That has a cost. If you are running a credit line at 9 to 11 percent to cover the gap, every $100,000 of stuck AR is costing you $9,000 to $11,000 a year in pure interest. If you are starving the next job to fund the last one, the cost shows up as missed work, slower production, or a job that comes in over budget because you could not pre-buy materials at the right time.

"Aged AR is not money in limbo. It is money that is actively costing you to hold."

The Growth Cost

This is the cost most contractors miss entirely. Aged AR caps your growth.

Trade contracting is a working capital business. Every job you take on requires cash up front: deposits on materials, payroll, subs, equipment. The faster you can turn AR into cash, the faster you can turn the next job. The slower your AR turns, the more capital it takes to run the same revenue.

Run the numbers on your own business. If your average days sales outstanding (DSO) is 75 days, you need roughly two and a half months of revenue tied up in AR at any time to operate. If you can get that DSO to 45 days, you free up roughly one full month of revenue back into working capital. For a $5 million contractor, that is approximately $400,000 of cash that goes from being trapped in receivables to being available to grow the business.

The Write-Off Cost

Eventually, aged AR that is not actively worked starts to get written off. Most contractors write off 2 to 5 percent of revenue every year. For a $5 million contractor, that is $100,000 to $250,000 of pure profit that hits the floor annually.

Here is the part that hurts. Most of those write-offs were recoverable. They were not bad customers. They were forgotten ones. The invoice slipped past 90 days, the office manager moved on to the next thing, and the customer who would have paid with two phone calls ended up in the write-off column at year end.

The Total Cost

Add it up:

• Surface cost: dollars stuck in 60+ days that should be on your balance sheet as cash
• Cash flow cost: 9 to 11 percent annual carrying cost on every aged dollar
• Growth cost: capped revenue capacity because too much capital is trapped in AR
• Write-off cost: 2 to 5 percent of annual revenue lost to unrecovered receivables

For most $1M to $20M trade contractors, the total annual cost of aged AR sits somewhere between 4 and 8 percent of revenue. That is more than most contractors pay in net profit margin in a slow year.

The Move

The move is to stop treating AR as a passive line item and start treating it as an active asset that needs to be managed. Most contractors do not have the time, the team, or the discipline to do this internally, which is exactly why specialty recovery exists.

Run your own numbers first. Pull your aging report. Find the 60+ day population. Multiply by 60 percent for a rough recoverable estimate. Then ask yourself: would your business look different if that number was sitting in your operating account right now?