Accounts Receivable Aging Report: Importance, How to Create &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 ageing 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?

An accounts receivable aging report is an accounting document that classifies outstanding customer invoices by the duration 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 days, 31-60 days, and 61-90 days past due.

In short, the accounts receivable aging report showcases the due amount of all your customers, which helps determine the effectiveness of the credit and collections function and identifies 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 for 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 Accounts Receivable Aging Report

The AR aging report is important 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?

An 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?

Creating an Accounts Receivable Aging Report involves several key steps. First, gather all outstanding invoices from your accounting system and organize them by customer. Next, define aging categories, such as 0-30 days, 31-60 days, 61-90 days, and over 90 days. Assign each invoice to the appropriate category based on its due date. Sum the amounts for each category to see the totals for each aging period. Finally, analyze the report to identify overdue payments and assess the overall status of receivables. This process helps manage outstanding invoices, improve cash flow, and identify potential collection issues.

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 improving workflows. It is crucial to manage your business’s cash flow and ensure timely collections. Here’s how to use it effectively:

1. Identify Overdue Invoices: Review the aging categories to pinpoint which invoices are overdue. Focus on the 31-60 days, 61-90 days, and over 90 days categories to identify late payments.
2. Prioritize Collections: Use the report to prioritize which customers to follow up with first. Start with those with the highest overdue amounts and longest overdue periods.
3. Assess Credit Policies: Analyze patterns in the aging report to evaluate the effectiveness of your credit policies. Frequent late payments might indicate the need for stricter credit terms or improved credit evaluation processes.
4. Improve Cash Flow: Use the report to forecast cash flow by identifying expected incoming payments. This helps in planning for expenses and investments.
5. Communicate with Customers: Use the information to send reminders or initiate conversations with customers about their overdue invoices. Maintain a professional and respectful tone to preserve customer relationships.
6. Evaluate Customer Relationships: Identify chronic late payers and assess whether to continue extending credit to them. Consider renegotiating terms or requiring upfront payments.
7. Support Financial Reporting: Integrate the AR Aging Report into your financial statements to provide a clearer picture of your company’s financial health.

By regularly reviewing and acting on your AR Aging Report, you can maintain better control over your receivables, enhance cash flow, and reduce the risk of bad debt.

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 with 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. Why is an AR aging report important?

An AR aging report is crucial for tracking overdue invoices, identifying potential bad debts, and managing cash flow. It helps businesses prioritize collection efforts, maintain healthy financial practices, and make informed decisions about extending credit to customers.

2. What is an aging schedule?

An aging schedule is a detailed report that categorizes a company’s accounts receivable based on how long invoices have been outstanding. It segments receivables into different time frames (e.g., current, 1-30 days overdue), providing a clear view of payment trends and potential collection issues.

3. 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.

4. What is the purpose of an aging report?

An aging report helps businesses manage their accounts receivable by categorizing outstanding invoices based on their due dates. It identifies overdue accounts, prioritizes collection efforts, assesses the effectiveness of credit policies, and provides insights into cash flow and potential bad debts.

5. What is an example of aging an accounts receivable?

Aging accounts receivable involves categorizing outstanding invoices into time buckets, such as current, 1-30 days overdue, 31-60 days overdue, and so on. For example, an invoice due on March 1st that remains unpaid by April 1st would fall into the 31-60 days overdue category.

6. What is a good AR aging percentage?

A good AR aging percentage typically means having a high proportion of receivables in the “current” or “1-30 days overdue” categories, ideally 80-90%. Lower percentages in older categories (e.g., over 60 days) indicate better receivables management and timely collections.