Your Guide to Accounts Receivable Aging Reports & How to Calculate AR Aging

Does your organization extend credit to customers? Do members of your accounts receivable team find themselves overwhelmed with the task of determining which customers have uncollected debt? An accounts receivable (AR) aging report simplifies the process and expedites receiving the money you’re owed.

Wait a minute, what is aging accounts receivable? Accounts receivable aging is a periodic report that categorizes a company’s accounts receivables according to the length of time an invoice is outstanding. Put another way, accounts receivable aging is a cash management technique used by accountants to evaluate the accounts receivable of a company and identify existing irregularities.

It is used to gauge and determine the financial health and reliability of a company’s customers by providing an illustration of the regularity and speed of payments received. For instance, if a company’s receivables are being collected slower than normal, this can signal a warning that the business may be in a downturn or that the company is taking on greater credit risk in its sales process.

How Accounts Receivable Aging Works

Accounts receivable aging takes into consideration the time period from when sales are realized to when accounts receivables are created to the balance sheet. Under the Generally Accepted Accounting Principles (GAAPs), there are two overarching types of A/R aging:

• Up to 6 months accounts receivables.
• Greater than 6 months accounts receivables.

Typically broken into 30-day increments, an accounts receivable aging report takes into consideration:

• Customer information: The customer or company name, contact details, account information, etc.
• Invoice details: The invoice number, issue date, total amount due, etc.
• Aging category: Typically broken into 0 – 30 days, 31 – 60 days, 61 – 90 days, and more than 90 days, the categories reflect how long an invoice has been outstanding.
• Amounts due: Consists of the amount due in each aging category per customer, the total amount due across all aging categories per customer, and the grand total of all receivables due.
• Credit memos: Included when credit memos have been issued, providing details of unused invoice credits.
• Comments: These notes detail specifics of collection efforts, payment agreements, and other relevant information.

An accounts receivable aging report is used to show current customer invoices, and the number of days invoices have been outstanding. It enables companies to track customer invoices, when payments are due, payments that have exceeded due dates, and helps the company determine if they are taking on more credit risks than they can monetarily handle.

Aging of Receivables Method

To illustrate, here’s an example of an aging accounts receivable.

If we assume that the company’s credit policy is 60 days, Company A and Company B are within the stated credit policy terms. However, both Company C and Company D have balances exceeding the company’s credit policy. Let’s further assume that balances owed that exceed 90-days are turned over for collections.

Taking the above scenario into consideration, the company can:

• Expect payments totaling $7,000 ($5,500 + $1,500)
• Send payment notifications to Customer B ($1,000)
• Follow up on payment notifications to Customer C ($1,500) and Customer D ($4,000)
• Start collections processes for Customer C ($2,000)

While the information contained in the accounts receivable report provides the information needed for companies to determine which customers are paying on time, anticipate cash flow, and highlight overdue accounts, the content is only as reliable as the data it summarizes.

AR aging days, sometimes called average collection time, is calculated by: AR aging days = (average accounts receivable × 360 days) / credit sales. This aging accounts receivable formula outputs the average number of days it takes customers to pay their invoices. By knowing how to calculate AR aging days and tracking this metric over time, you can establish a useful guide for determining when you need to adjust to payment terms or collections practices.

10 Steps to Create and Analyze Accounts Receivable Aging Reports

Accounts receivable aging reports can be prepared in a variety of ways such as by using spreadsheets or billing software, however there’s information that needs to be gathered and steps to be followed.

Let’s start with what is needed to create an accounts receivable aging report. To prepare an accounts receivable aging report you’ll need 3 inputs, 1) Customer names, 2) The outstanding balances for each account, 3) Aging schedules.

Here are 10 steps to creating an accounts receivable aging report.

1. Gather all accounts receivable data from your accounting systems
2. Organize the data by customer name and invoice date
3. Create aging categories, typically 0-30 days, 31 – 60 days, 61 – 90 days, and over 90 days
4. Calculate the total amount owed for each category
5. Sum the total accounts receivable to capture a comprehensive view
6. Analyze the aging report to identify overdue accounts
7. Use the information to prioritize collection efforts
8. Regularly update the aging report to track changes over time
9. Set up reminders for follow-up on overdue accounts
10. Review and adjust credit policies based on aging trends

Although the above provides the basics, step 6 – analyzing the accounts receivable aging report – requires a bit more detail.

Analyzing Aging Receivables

Review accounts receivable aging reports on a consistent basis, such as weekly or monthly. By doing this, you’ll be able to determine and assess:

Delinquent accounts: By identifying which customers are late on their payments and how long their invoices have been overdue, you’ll be able to focus on the accounts that need immediate attention.

Bad debt: The longer an invoice remains unpaid, the less likely it will be paid. In fact, a general rule of thumb states that accounts that are more than six months old are unlikely to be collected – except through collections or a court judgment.

Send payment notifications: Reach out to customers with overdue accounts and address issues that may be causing payment delinquency.

Negotiate payment plans: Especially useful for customers that are acting in good faith, payment negation can help you gradually recover owed amounts.

Adjust credit policies: When you begin to notice patterns of late payment from certain customers, it may be time to adjust your credit terms for those customers, or alternatively move them to cash on delivery (COD) terms.

Forecast cash flow: Adjust the business’ forecasting based on the amount of money the report shows you should be receiving.

Write off bad debt: When the debt becomes unrecoverable, you can write the amount off as a bad debt expense.

Implement proactive measures: A goal of every organization is lessening unpaid invoices and bad debt. Accomplish this by conducting more thorough credit checks on new customers, requiring deposits or partial up-front payments or changing customer payment terms.

Advantages of Accounts Receivable Aging Reports

Given the importance of accounts receivable aging, the accounts receivable aging report provides numerous benefits, such as:

• Access to relevant information like sales transactions, receivable amounts, etc.
• Better financial planning by leveraging the A/R aging reports to gain a clearer picture of expected cash inflows from receivables.
• Improved cash flow management to ensure the company has the necessary funds for continued operations and investments.
• Taking proactive measures such as phone calls or emails to help ensure timely payments.
• Identifying and promptly acting on overdue accounts to reduce bad debt.
• Prioritizing the most overdue accounts for more effective and strategic collections processes.
• Assessing the credit worthiness of customers to determine which customers should not receive credit terms or may require an adjustment to their credit terms.
• Determining the allowance for doubtful accounts and the total amount to be written-off.
• The ability to demonstrate regulatory compliance and meet reporting requirements.
• Helping management make sales-related decisions.
• Identifying customers that may be facing financial difficulties and working with them to find mutually beneficial solutions, which will ultimately improve customer relationships and enhance loyalty.

There are two things to keep in mind to ensure you are receiving all the benefits this report has to offer. First, be sure the data used is accurate and timely, and second sync invoices with the generation of the accounts receivable aging report. For instance, if the company raises invoices at month end and prepares the aging A/R report a few days later, outstanding payments will be reflected in the report even when payments for some of the invoices will be received shortly after the report is created.

While accounts receivable aging reports are critical for companies to keep their finger on the pulse of money owed, there are other reports that every business needs.

Streamline and Automate Accounts Receivable Aging

While the benefits of accounts receivable aging reports can’t be underestimated, there is a potential disadvantage. Manually creating aging reports takes skilled manpower and is prone to errors. Regardless of your billing model, you need a system that takes the effort out of accounts receivable management processes.

BillingPlatform provides the tools needed to improve productivity and automate tasks and business processes, streamlining billing cycle processes, reducing errors, and minimizing revenue leakage.

With BillingPlatform, you can:

• Automate collections, dunning, approvals, invoicing, notifications, and much more
• Send invoices based on customer-centric cycles and settings
• Automate accounts receivable
• Track late payments and alert customers when delinquent
• Implement automated retry logic for expired credit cards
• Create automatic notifications when credit cards are declined
• Generate accurate financial reports with rules-based or tailored workflow

Our billing solution provides the reporting and proactive data analysis you need to quickly and effortlessly monitor the health of your business. And with business intelligence and dashboards built into the platform, you’ll have the tools needed to gain the insights needed to keep your business running at peak performance. Let the experts at BillingPlatform show you more today!