Accounts Receivable Aging Report: Importance, How to Create and Use It?

Introduction

Extending trade credit is a common practice in B2B businesses. However, it may surprise you to know that 68% of companies receive more than half of their payments after the due date, which often leads to cash flow problems.

Now, you might wonder what to do about this situation. The logical answer might seem to stop offering credit to customers. But in reality, to remain competitive and foster growth, it’s essential to continue extending credit. 

So, what’s the solution? The key lies in getting paid faster, and you can achieve this by enhancing your collection process. This is where an accounts receivable aging report comes into play.

This invaluable report acts as your guide in the complex landscape of credit and collection. It helps you identify inefficiencies and irregularities effortlessly. By harnessing its power, you can pinpoint delinquent customers and establish optimal invoice payment terms.

In this article, we will comprehensively cover everything about accounts receivable aging reports. We will explain their purpose, why they are crucial, and how to create them.

What Is an Accounts Receivable Aging Report?

Accounts receivable aging 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 short, 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. 

Example of AR Aging Report

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 this:

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

The AR aging report helps analysts understand the average age of their customers’ outstanding invoices and collect the dues within a stipulated period.

Also, note that the AR aging report is crucial when forecasting bad debt.

Importance of the Accounts Receivable Aging Report

The AR aging report holds significant importance for several reasons – it provides important statistical information about your customer’s payment history and the effectiveness of credit and collection functions. It also has several other benefits, which are listed below:

• Quicker identification of complications: Regularly tracking your AR aging report will help you identify any complication before it escalates to become a major issue like cashflow problems.
• Maximize your collections: By analyzing your customers’ late payment history through the AR aging report, your company gains the flexibility to adjust its AR processes, thus maximizing collections with extra effort.
• Withhold services before payment: Examining the AR aging report empowers you to withhold future service offerings until customers with outstanding dues settle their bills before the specified date. This ensures you won’t provide services without receiving payment.
• Forecasting bad debt: The AR aging report plays a crucial role in forecasting bad debt by facilitating the collection of overdue payments. As invoices age, the likelihood of collecting diminishes. Additionally, the report provides vital analytics that inform credit policies and collection strategies, contributing to the reduction of bad debt.

What Is Included in an Accounts Receivable Aging Report?

Accounts receivable aging report typically includes the following components:

1. Customer Information: The report begins with a list of customers or clients who owe money to the company.
2. Invoice Details: It provides information about each outstanding invoice, such as the invoice number, date of issuance, and the original invoice amount.
3. Due Dates: The report includes the due date for each invoice, indicating when payment was originally expected.
4. Aging Categories: Invoices are categorized based on the length of time they’ve been outstanding, often divided into periods such as 0-30 days, 31-60 days, 61-90 days, and 90+ days past due.
5. Outstanding Balances: The amount that remains unpaid for each invoice is listed, allowing for a quick view of the outstanding balances.
6. Total Amounts: The report usually provides a summary section that totals the outstanding balances for each aging category and calculates the total accounts receivable.
7. Notes and Comments: Additional comments or notes may be included to provide context or explanations for specific cases.

This report helps businesses visualize their outstanding receivables, identify overdue payments, and take appropriate actions to improve collections and cash flow management.

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. For example, you might create categories like:

• 0-30 days past due
• 31-60 days past due
• 61-90 days past due
• 90+ days past due

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?

The AR aging report gives us a statistical report of the pending invoices from the customer’s end and insights on how to improve workflows. You can effectively use the AR aging report for:

1. 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.



2. 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 let you take appropriate action before it becomes a problem to worry about.
3. Strategize the collection 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.

Wrapping Up

An accounts receivable aging report is essential for maintaining a healthy cash flow and preventing collection issues from becoming major problems. It also reduces the risk of bad debts by analyzing customer payment habits. This report enables real-time tracking of your company’s receivables.

Traditionally, AR managers have avoided creating these reports due to their time-consuming manual nature, which involves reconciling customer payments, invoices, and tracking overdue payments. However, with HighRadius accounts receivable automation software, you can perform these tasks in real time. The software matches customer payments to invoices upon arrival and provides instant insights to AR managers.

FAQs

1. What is an aging report?

An accounts receivable aging report provides a summary of unpaid customer invoices. It is used by businesses to track and analyze the aging of their accounts receivable. Also, It helps businesses monitor their cash flow, identify potential collection issues, and make informed decisions regarding credit terms and collection strategies. 

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 maintain 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.

4. How do I make an aging report?

To create an aging report, follow these steps:

1. Review all outstanding invoices.
2. Categorize invoices by aging periods (e.g., 0-30 days, 31-60 days, etc.).
3. Segment customers based on overdue amounts and days outstanding to compile the final report.