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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.
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:
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|
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.
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:
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.
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.
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.
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.
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|
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:
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]|
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.
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.
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.
An acceptable accounts receivable aging would be the invoices that are due within the next 30 days from the date of issue.
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.
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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HighRadius Integrated Receivables Software Platform is the world’s only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway – covering the entire gamut of credit-to-cash.