AR Aging Report: Importance, How to Create & Use It?

What is accounts receivable aging report?

Accounts receivable ageing report classifies outstanding customer invoices by the length of time they’ve been unpaid. It assists businesses in monitoring overdue payments, evaluating credit risk, and effectively managing cash flow. The report typically divides receivables into time periods, such as 0-30, 31-60, and 61-90 days past due

In other words, the accounts receivable aging report showcases the due amount of all your customers which helps in determining the effectiveness of the credit and collections function and identifies the irregularities in the process. 

To understand the accounts receivable aging report, let’s take the example of Mr. Dave, who works in company ABC. His AR aging report in the balance sheet looks like:

• 30 days overdue: $100
• 60 days overdue: $200
• 60+ days overdue: $700

Here’s what his accounts receivable aging schedule would look like:

The AR aging report helps analysts to understand the average age of your customers’ outstanding invoices, and collect the dues within a stipulated period of time. Also, note that AR aging report is crucial when forecasting bad debt.

What is the importance of an accounts receivable aging report?

Quicker identification of complications

If you track your AR aging report at a fixed interval of time (weekly or monthly), it will help you identify any complication before it escalates to become a major issue like cashflow problems.

Maximize your collections

You get the agility to modify your AR processes by analyzing your customers’ late payment history. This will help your company to maximize the collection with some extra effort.

Withhold services before payment

Analyzing the AR aging report will allow you to withhold future service offerings until the customers with outstanding dues clear the bills before the specified date. This will ensure that you won’t lose cash without payment.

Forecasting bad debt

AR aging is an important step in forecasting bad debt since it allows the company to collect payment on past due, which becomes less likely as an invoice age with time. The aging report also provides essential analytics that influences credit policies and collection efforts that helps in reducing bad debt.

How to create an accounts receivable aging report?

Here is how you can create an aging report from scratch:

Step 1: Review all the outstanding invoices

Step 2: Segregate all the invoices using the aging schedule and the due amount

Step 3: After getting the list of customers with overdue bills, categorize them based on the total due amount and the number of days outstanding

The final aging report will look like this:

How to use an AR aging report?

Determining the average collection period

Based on the payment history of your customers, you can calculate the average collection period by determining the average number of days it requires to collect the due receivables. If the average collection period goes up with time, then it is an indication that you need to evaluate the payment terms.

Average collection period= [(Total number of days x average accounts receivable)/ Net credit sales]

Tracking potential cash flow problems

Accounts receivable is an important metric that helps in determining the cash flow of a business. AR aging report can point out the potential credit risks and lets you take appropriate action before it becomes a problem to worry about.

Strategize the collections process

An AR aging report will help you plan your collections process in a better way. For example, if one of your customers has an outstanding invoice for more than 90 days, then you have to be a little more diligent in your collection effort. Moreover, for accounts with less than 30 days pending invoices, you can apply smart dunning methods.

Conclusion

An accounts receivable aging report will help your business in maintaining a healthy cash flow by eliminating collections problem before it becomes major issue. It will also reduce the risk of bad debts by helping you analyze the payment habits of your customers. The AR aging report will also allow you to extract real-time reports of your company’s receivables. 

FAQs

1. What is a good AR aging?

An acceptable accounts receivable aging would be the invoices that are due within the next 30 days from the date of issue.

2. Why is an AR aging report important?

An AR aging report is important because it provides you with analytics of the due payments and helps you in maintaining a healthy cash flow by improving the billing process.

3. What is an aging schedule?

An aging schedule is a table that includes the company’s accounts receivable sorted by their due dates. It helps in analyzing whether the customers are paying on time or not.