What is an Accounts Receivable Aging Report?
An accounts receivable aging report is a type of financial report that shows businesses what bills have not been paid and how long they have been past due. It helps businesses figure out patterns of late or missed payments so they can better handle their cash flow, cut down on losses, and get paid for what they owe.
“Aging” refers to the time since a statement was sent out. “Accounts receivable” means the money that customers owe a business. The report shows how much money is still owed to each customer and sorts them into groups based on how long they have been past due or “aged.”
Usually, the age times are between 0 and 30 days, 31 and 60 days, 61 and 90 days, and longer than 90 days. This makes it easy for businesses to see how many accounts receivable are past due and how much they add to the overall in each area.
Synonyms
- AR aging report
- Aged receivables report
- Aging schedule
What an AR Aging Report Is Used For
An AR age report’s main job is to track how quickly customers pay their bills. It helps companies find accounts that need to be paid and take the proper steps to get paid on time.
When the dunning process takes too long or doesn’t work, businesses may consider hiring outside collection firms to help them get past-due payments.
Businesses can also tell if a customer is creditworthy because they usually don’t give sales discounts, better payment terms, or higher credit limits to customers who have a lot of bills that aren’t paid on time.
The AR aging report is essential for the business’s cash flow. Monitoring unpaid customer bills helps businesses find and stop lost income, customers who leave without warning, and the cash flow problems that come with late payments.
What Makes Up an AR Aging Report
An AR aging report has two parts: invoices that haven’t been paid and times when they are due.
Bills Not Paid
The due date appears next to unpaid bills on the aging schedule. The list usually has the names of the customers, their billing numbers, the amounts they owe, and the total amount that is owed for all of them.
Dates of Due
Businesses can see which bills are past-due and how much time has passed since the invoice was sent by sorting outstanding payments by their due dates. When businesses are trying to get paid, they can look at how many days the bill is past due to figure out which customers are the most behind and use different “dunking” tactics on those customers.
How to Figure Out How Old Your Accounts Receivable Are
To use the accounts receivable aging formula to figure out how your outstanding amount affects things, you’ll need two essential pieces of information:
- Average amount of money owed: Most of the time, this is how much money people owe your business. To find this, add the accounts receivable’s starting and finishing balances for a specific period (like a month or a year) and divide by two.
- Credit sales: the total amount of goods or services sold on credit during the same period you used to figure out your average accounts receivable.
The formula to calculate the aging of accounts receivable is as follows:
Aging of Accounts Receivables = (Average Accounts Receivables * 360 Days) / Credit Sales
It is essential to remember that this formula will only work if your company lets people buy things on credit. If you only deal in cash, you won’t have to determine any accounts due.
Advantages of Allowing Accounts Receivable to Age
Figuring out how old accounts receivable are helps businesses find possible credit risks, find income leaks before they become big problems, and ensure they use the proper dunning management procedures.
Being able to see into billings
The payment process affects the customer in the same way that it affects the business itself.
Incorrect reporting of accounts receivable on the balance sheet can happen when there are problems with bills, which can also cause incorrect financial reporting. Customers find it hard to plan their spending when they get bills that aren’t correct or are late.
Businesses can see their customers’ bills more clearly and ensure they are handled correctly and quickly with accounts receivable aging reports.
Watch your cash flow.
Businesses can see their income improve with more control over the billing and reporting processes.
Finding out how long it takes them to collect on average helps businesses make intelligent choices about big purchases like investments and growth.
By proactively managing cash flow, the business can keep its finances in good shape and succeed in the long run.
Find the bad debt.
Bad debts are unpaid bills or accounts from customers that are not likely to be collected because the customers either can’t or won’t pay. This usually happens when a customer files for bankruptcy, fights the charges, or doesn’t pay when asked to.
Businesses care about lousy debt because it means lost money, wrong financial reports, and, in the worst cases, bad financial health.
An AR aging report sorts past-due bills into groups based on how long they’ve been past-due. This helps businesses find lousy debt. Businesses can find patterns of regularly late payments or large balances owed by looking at this report. This could be a sign of bad debt.
Companies can then take preventative steps, like changing credit terms or starting collection efforts, to lower the risk of building up receivables that can’t be paid.
Change the credit rules.
For customers who always pay on time, it’s often necessary and fair to provide services or extend payment dates. However, customers who don’t pay on time significantly strain the business’s cash flow and raise the risk of bad loans.
Companies can use information from AR aging reports to change their collection practices smartly to lower the risk of bad credit.
For example, companies could make it harder for high-risk customers to get credit by requiring a more significant down payment, lowering credit amounts, or cutting payment due dates.
Make the collection process better.
The main problem with debt collection is that some customers won’t pay, which is also known as “bad debt.”
Based on trends and the total value of all overdue invoices, an AR aging report helps businesses decide which accounts are worth chasing and which are already too late.
By avoiding unnecessary contact with customers who always pay on time, this focused approach to the collections process not only speeds up the process of getting back debts but also helps keep good customer relationships.
Having better relationships with customers
Businesses can give discounts and better payment choices to their best customers when they can tell the difference between a credit risk and a customer who pays on time.
Giving rewards or more flexible payment options to customers who pay on time regularly builds a good business relationship and pushes them to keep paying on time.
This method improves the overall experience for the customer, making them more likely to stick with the company, making them happier, and leading to good reviews.
Accounts Receivable Aging Report Trends
No longer is accounting software the only way for businesses to keep track of their accounts. Many businesses use automatic tools and billing software to handle the growing complexity of unpaid invoices and possible cash flow issues.
Automating Things
Process automation is becoming more popular in all business areas but is particularly helpful in accounting and billing.
Automation makes things more accurate, speeds up processes, lets you collect data more precisely, and helps with compliance.
Software for billing
Billing software handles the whole billing process, making it easier for businesses to handle past-due accounts with as little help from humans as possible.
It also works with most accounting programs to give businesses more complete reports that help them see the big picture and make choices based on the most up-to-date data.
