What is an Aging Report And How Does It Help Finance Teams?
Côme Chevallier
Sep 27, 2024
Are your outstanding invoices piling up?
Wondering which ones are at risk and which should be dealt with first?
Whether you are a small business owner or a corporate controller, you know how critical it is to pay keen attention to your overdue payments.
Sometimes, you have to compromise and take a phased approach to collect the total amount due from your customers.
But that does not mean you give a free pass to all the pending payments. This is why it is critical to review your aged receivable balance and take action when needed. Keep reading to find out:
Need help calculating your aging report? Have a look at our free metric spreadsheet.
What is an Accounts Receivable (AR) Aging Report?
An accounts receivable (AR) aging report tells how long an invoice has been due for payment, and is an essential tool for managing cash flow. It categorizes unpaid invoices by the length of time they've been due, typically in 30-day intervals (e.g., 0-30 days, 31-60 days, etc.).
Also known as an Aged Receivables Report, these reports list all unpaid invoices along with customer details, amounts owed, and how long the payments have been overdue. By reviewing an AR aging report, businesses can quickly assess the health of their receivables, identify overdue accounts, and prioritize collections efforts.
Why are Accounts Receivable (AR) Aging Reports Important?
You wouldn't want to sell your services for free. So, you will need to keep track of all those nice gestures you show by allowing your customers to either pay in installments or stall their payment until an acceptable due date.
Late payments can disrupt your company's cash flow. A 2023 survey from Atradius found late payments have been steadily increasing and now average 49% of all B2B sales, with a 73-day average wait to collect payment. The level of bad debts also remains a concern at 6% of all B2B invoiced sales.
An accounts receivable aging report is essentially a report of your unpaid customer invoices. At a single glance, you can quickly evaluate which payments need to be collected with priority and how much longer you can wait for pending payments. You can use a financial relationship management software for this.
And, as all business owners must already be aware, failure to track such important information could lead to missed payments, miscommunication with the customer, and a mistaken idea of your overall financial status. So, here are ways an AR aging report helps:
Identify the effectiveness of credit terms and collection functions
Detect irregularities in the collection process
Avoid cash crunch situations in your company
Identify customers who make frequent late payments and take the necessary actions or changes to prevent such instances in the future
Determine whether to withhold services or product offerings until the customer makes the pending payments (hopefully, you won’t have to go through a collection agency)
Analyze your customer behavior (follow up when necessary) and realign your invoice timeline, so you get paid on time.
What Is the Method for Aging of Accounts Receivables?
Creating an accounts receivables aging report is straightforward. You simply need the information on all your open invoices and to, in turn, organize them based on their aging schedule.
An aging schedule is a list of data of all aged receivables from your customer organized into 30-day date ranges or aging categories. The time brackets could be categorized as anything from 1 to 30 days, 30 to 60 days, 60 to 90 days, and so on.
You can also add a column for current invoices not due yet. This can help you be proactive in your collection process by sending reminders before the due date.
Now, simply follow these steps to get started creating a simple aging report:
Step 1: Review all your open invoices
Step 2: Gather the invoices per customer to help you visualize invoices issued at different intervals for the same customer
Step 3: Classify the open invoices into the different time brackets according to your aging schedule
Step 4: As the final step to organize your aged receivables, order the customer list based on the length of the outstanding duration and the total due payment
By organizing your nonpaying customer into different time brackets, you can easily see the oldest pending payments that need to be collected first.
Need help calculating your main AR metrics? Have a look at our free spreadsheet!
Automating Aging Reports
The best way to create aging reports is to automate them and instantly view all your due payments and related data.
If you use an invoicing solution like QuickBooks, features like aging reports help organize the available open invoice data in an intuitive and easy-to-understand manner. You can configure the aging schedule, easily perform search, filter, and ordering operations to get a comprehensive view of all aging report information.
We encourage you to create additional automated reports to help you track important financial KPIs, such as your DSO, Aging Balance, Cash Flow, or Billing Cohorts.
This will help you better visualize the health of your cash collection. You can create advanced AR aging reports with a accounts receivable management software, like this:
Benefits of an Accounts Receivable (AR) Aging Report
An accounts receivable aging report can be helpful in multiple ways. Besides giving you a better understanding of your aged receivables and letting you know about due payments. Here are ways you can make good use of aging reports:
1. Estimate Bad Debt Risks
Certain invoices are so long past the due date that you will not be able to collect them and will have to perform a write-off. There could be many more reasons a payment could be deemed uncollectible, like the payers being unable to pay back or other conditions. Such outstanding invoices are called bad debt and represent an total amount of loss you will be incurring. The IRS lets companies write off aged receivables, but only after they have decided to abandon efforts to collect the debt.
For every accounting period, you need to keep track of these bad debts and estimate how much they cost your company. And you can use an aging report to get the accurate data required to do so.
You can also further use the estimation of bad debts to revise your policies that allow for leniency to doubtful customer accounts. For example, you can compare historical customer interactions, their past due payments, and how much bad debt the doubtful account has contributed to see if you need to revise the allowances you make.
Typically, the longer your debts remain uncollected, the chances of them going uncollected forever will keep increasing. A periodic review of your aging reports helped by accounting software will give you the direction needed to ensure you keep bad debts under control.
2. Identify Cash Flow Issues
To ensure the company's financial health is sound, you must ensure that your customers pay you and are paying on time. According to Jessie Hagen, U.S. Bank, 82% of all companies fail because of cash flow mismanagement. Let us give you an example scenario: you get a massive order from a customer who does not pay upfront. So, you borrow money from investors or banks to acquire the supplies and go ahead with the product delivery.
If the customer does not pay you back on time, you will end up with amounting interests that could negate any amount of profits you might get whether the customer ultimately pays you. You need to know when you can wait for payment before it leads to a loss. An aging report helps you identify such scenarios and keeps you continually aware of your company's cash flow.
Are late payments piling-up? Have a look at our free guide with tips to get paid on time!
3. Refine Your Company’s Accounts Receivable Collection Practices
Sometimes, you don't get paid on time because your customer has a different pay cycle than your company offers. In such cases, all you need to do is realign your service delivery or invoice date alerting mechanism to match their pay cycle, lessening the instances of late payments. An aging report helps you analyze such scenarios and evaluate your collections processes.
If you have multiple old accounts that stretch beyond the 60 to 90 days time bracket, it means that your current collections strategy could be weak. Reminding your payment terms is a good place to start.
You can improve your A/R collection by implementing new practices such as prioritizing your collection efforts, sending payment reminders for outstanding balances the first-day payment is late and adding in more in-person communications. Doing so will allow your company to maintain a healthy cash flow and avoid any potential cash flow problems.
For more tips to improve your collection processes, check out our 8 best practices to effectively manage Accounts Receivable.
4. Assess Your Credit Policies
An Aging report is a good way to evaluate the effectiveness of your credit policy quickly. For instance, if most of your pending payments are from a single customer, it is quite obvious that there is an issue with this customer. In that case, you need to identify why they are delaying payments and potentially employ specific collection practices with that particular customer.
But if you have multiple customers lagging behind on their payments, it could denote an underlying issue with your credit policy. You can note such scenarios and assess whether your credit risk is comparable to the actual industry standards.
5. Improve Inventory Management
Aging accounts can also help deal with inventory by helping you assess when would be the right time to sell off with discounts and when to stockpile your inventory. In addition, you can compare the various costs related to warehousing, lost sales, retail space, and more so that you can plan for optimized inventory control that will cut down on unnecessary expenses.
Want to gain additional insights on your financial analytics and improve your cash collection? Try our free plan: Discover Upflow!
Key Takeaways:
Accounts Receivable (AR) aging reports categorize unpaid invoices based on how long they've been outstanding. This allows you to identify late payments impacting your cash flow.
AR aging reports go beyond simply identifying late payments. They can also help you avoid missed payments altogether. By flagging invoices approaching their due date, you can proactively send reminders to customers.
AR aging reports provide valuable data on customer payment behavior. You can analyze trends to see which customers are consistently late with payments. This information allows you to assess the effectiveness of your credit policies and collection strategies. If a particular customer segment exhibits frequent late payments, you might need to adjust your credit terms or implement stricter collection practices for that group.
Estimating bad debt risk is another benefit of aging reports. Invoices outstanding for extended periods are less likely to be collected. By identifying these early, you can take necessary actions, such as writing them off or employing more aggressive collection tactics.
Manually creating AR aging reports can be time-consuming and prone to errors. Fortunately, most accounting solutions offer automated AR aging reports. These reports not only save time but also ensure data accuracy, allowing you to focus on strategic financial decisions based on reliable real-time information.
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