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

15 November, 2022
5min read
Timothy Fogarty, AVP, Digital Transformation
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What you'll learn

  • What is accounts receivable aging report?
  • Importance of AR aging report
  • How to create an AR aging report?
CONTENT
What is accounts receivable aging report?
What is the importance of an accounts receivable aging report?
How to create an accounts receivable aging report?
How to use an AR aging report?
Conclusion
FAQs
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An aging report is a consolidation of records that consists of overdue invoices listed from a specific date. It is used to measure the financial health of a company and its customers. The report also includes other details such as the customer’s receivables, duration of the invoice, and amount owed.

What is accounts receivable aging report?

An accounts receivable aging report is a consolidation of records that shows the due amount of all your customers from the day the invoice was issued. This report helps businesses identify the invoices which are still outstanding and track their collection efforts.

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:

Customers Total Outstanding 1-30 days 31-60 days 61-90 days 90+ days
ABC Ltd. $100,000 $10,000 $10,000
XYZ Inc. $200,000 $50,000 $25,000 $25,000
RST Ltd. $300,000 $60,000 $60,000
FIG Inc. $400,000 $100,000 $100,000
Total $10,00,000 $220,000 $25,000 $35,000 $60,000 $100,000

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?

The AR aging report 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:

  1. Quicker identification of complications
  2. 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.

  3. Maximize your collections
  4. 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.

  5. Withhold services before payment
  6. 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.

  7. Forecasting bad debt
  8. 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:

Sl. No. AR aging Amount due
1 0-30 days $300k
2 31-60 days $250k
3 61-90 days $180k
4 91-120 days $120k
5 121-150 days $70k


Aging report excel template

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
  2. 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]

  3. Tracking potential cash flow problems
  4. 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.

  5. Strategize the collections process
  6. 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. 

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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.

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