Accounts Receivable Aging Report
Table of Contents
What is an Accounts Receivable Aging Report?
An accounts receivable aging report is a financial report that gives companies an overview of their unpaid invoices and how long they are past due. It helps businesses identify patterns of late payment or delinquency to efficiently manage cash flow, minimize losses, and collect outstanding receivables.
“Accounts receivable” refers to any money owed to a company by its customers, while “aging” is the period of time that has elapsed since an invoice was issued. The report lists each customer’s outstanding receivable balance and categorizes them according to how long they have been past due, or “aged.”
The aging periods typically range from 0-30 days, 31-60 days, 61-90 days, and more than 90 days. This allows companies to easily analyze the number of accounts receivable that are overdue and how much in total they amount to in each category.
Synonyms
- AR aging report
- Aged receivables report
- Aging schedule
The Purpose of an AR Aging Report
The main purpose of an AR aging report is to monitor how quickly customers are paying their invoices. It helps companies identify any outstanding receivables and take appropriate actions to collect payments in a timely manner.
In scenarios where the dunning process is taking too long or isn’t working, companies may consider using outside collection agencies to help them collect overdue payments.
It also gives businesses insight into customer creditworthiness — businesses typically choose not to offer sales discounts, favorable payment terms, or extended credit limits to customers who frequently have outstanding invoices.
In every sense, the AR aging report ensures healthy cash flow for the business — paying attention to unpaid customer invoices helps companies detect and prevent revenue leakage, involuntary churn, and cash flow issues associated with late payments.
Components of an AR Aging Report
There are two components of an AR aging report: unpaid invoices and due dates.
Unpaid Invoices
On the aging schedule, unpaid invoices are listed according to their due date. The list typically includes customer names, invoice numbers, amounts due, and the total amount owed for each customer.
Due Dates
Outstanding payments are arranged by their due dates, helping businesses identify which invoices are overdue and how much time has elapsed since the invoice was issued. During the collections process, businesses can look at days overdue to assess which customers are most delinquent and apply different dunning strategies accordingly.
How to Calculate Accounts Receivable Aging
To measure the impact of your outstanding balance using the accounts receiveable aging formula, you’ll need two key pieces of information:
- Average accounts receiveables: The average amount of money owed to your business by customers at any given time. You can calculate this by adding the beginning and ending accounts receivable balances for a specific period (e.g., a month or a year) and dividing by two.
- Credit sales: The total value of goods or services sold on credit during the same period as your average accounts receivables calculation.
The formula to calculate the aging of accounts receivables is as follows:
Aging of Accounts Receivables = (Average Accounts Receivables * 360 Days) / Credit Sales
It’s essential to note that this formula is only applicable if your business offers credit sales to its customers. If you operate on a cash-only basis, there won’t be any accounts receivables to calculate.
Benefits of Accounts Receivable Aging
Calculating accounts receiveable aging helps organizations identify potential credit risks, spot revenue leaks before they become significant, and ensure proper dunning management processes are carried out.
Visibility Into Billings
The billing process is just as much a part of the customer experience as it is an internal operation.
Problems in billing can lead to inaccurate reporting of accounts receiveable on the balance sheet, and thus inaccurate financial reporting. For customers, incorrect and untimely invoices make it tough to budget for a product.
With accounts receivable aging reports, businesses have better visibility into customer billings and can ensure they are processed correctly and efficiently.
Manage Cash Flow
When companies have more control over their billing and invoicing processes, they have greater visibility into their revenue.
Having a clear understanding of a their average collection period allows companies to make informed decisions about financial commitments like investments and expansions.
This proactive approach to cash flow management helps to maintain a healthy financial position and ensures the long-term success of the business.
Identify Bad Debt
Bad debt refers to the outstanding invoices or receivables that are unlikely to be collected from customers, either due to their inability or unwillingness to pay. This often occurs when a customer declares bankruptcy, disputes the charges, or simply ignores payment requests.
Bad debt matters to businesses because it represents lost revenue, inaccurate financial reporting, and (in serious cases) poor financial health.
An AR aging report helps businesses identify bad debt by highlighting overdue invoices and categorizing them based on their age. By analyzing this report, businesses can detect patterns of consistently late payments or large outstanding balances, which may indicate potential bad debt.
That way, companies can take proactive measures, such as adjusting credit terms or initiating collection efforts, to minimize the risk of accumulating uncollectible receivables.
Adjust Credit Policies
Providing services or extending payment deadlines is often necessary and well-deserved for customers who consistently pay on time. But customers who fail to make timely payments put tremendous strain on the business’s cash flow and increase the risk of bad debts.
To mitigate bad credit risks, companies can use the insights from AR aging reports to make informed decisions about adjusting their collection policies.
For instance, businesses could tighten credit terms for high-risk customers by requiring a higher down payment, reducing credit limits, or shortening payment deadlines.
Improve Collection Processes
The main difficulty with collections practices is there are some customers who just won’t pay (i.e., bad debt).
An AR aging report helps companies determine — based on trends and the overall value of individual overdue invoices — which accounts are worth pursuing and which are sunk costs.
This targeted approach to the collections process not only increases the efficiency of debt recovery but also helps to maintain positive customer relationships by avoiding unnecessary communication with clients who consistently pay on time.
Better Relationships With Customers
When busiensses can tell the difference between a credit risk and a customer who makes timely payments, they can reward their best customers with favorable discounting and payment options.
Offering incentives or flexible payment terms to customers who consistently pay on time fosters a positive business relationship and encourages continued on-time payments.
This approach contributes to an overall better customer experience, which in turn leads to increased customer retention, higher satisfaction levels, and positive reviews about the company.
Trends in Accounts Receivable Aging Reports
Accounting software is no longer the only tool businesses use to manage their receivable balances. Most organizations use automated tools and billing software to deal with increasing complexities with outstanding invoice balances and potential cash flow problems.
Automation
Process automation is a trend across every department, but accounting and billing are especially benefiting from advances in technology.
Automation increases accuracy, streamlines processes, enables a more targeted collection process, and helps with compliance.
Billing Software
Billing software takes care of billing operations start to finish, helping companies manage overdue accounts with as little human intervention as possible.
It also integrates with major accounting systems to provide more comprehensive reports, so businesses can see the big picture and make decisions based on up-to-date information.
People Also Ask
What is an AR aging schedule?
An AR aging schedule is a report that shows all outstanding accounts receivables and their days overdue. The report also indicates the total amount of money owed by customers to the business.
In an AR aging schedule, there are typically four columns:
First column: Total value of invoices that are 30 days old or less
Second column: Total value of invoices that are more than 30 days but less than 60 days past due
Third column: Total value of invoices that are between 61 and 90 days past due
Fourth column: Total value of invoices that are more than 90 days past due
What is a good AR aging percentage?
Typically, a good AR aging percentage is between 10% and 15%. Depending on the specific circumstances, the percentage may vary, but it is generally considered ideal to keep the ratio of accounts receivables to total sales at or below 10%.
What is the industry standard for AR days?
The standard for AR days varies from industry to industry (and source to source). According to data from 3,265 companies, the standard is 48 days. For some industries — such as ecommerce — this figure is considerably lower whole others are more than double.
