Accounting

What Is an Aging of Accounts Receivable Report?

An accounts receivable aging report is a schedule of all customers that owe the business money and how behind those customers are on payments. Essentially, it’s a collection tool that makes it easy to follow up on past-due balances and identify late-paying customers.

Why Are Accounts Receivable Aging Reports Important?

The accounts receivable aging report presents a snapshot of the status of all outstanding invoices and the number of days those invoices have been outstanding. This report provides several actionable insights to help you improve your collection functions and cash flow.

Here are several ways you can use your company’s accounts receivable aging schedule.

Improve your collection process

The longer an invoice remains delinquent, the less likely you are to be able to collect on it. According to Dun & Bradstreet, accounts that are 90 days past due have a 69.6% chance of being collected. After six months, the probability of collecting that invoice drops to 52.1%, and after one year it drops to just 22.8%.

Reviewing your AR aging report regularly can help you spot late payers and step up your collection efforts before those invoices become uncollectible.

Avoid cash flow problems

Collecting customer payments is vital to maintaining a healthy cash flow. 

Unpaid customer invoices and late payers can leave you without the necessary cash to pay your business’s bills, pay debts, and expand your business. Periodically checking in on your AR aging report helps you stay on top of receivables and take preemptive measures to keep your cash flow flowing, such as sending payment reminders or not extending credit to customers that are bad credit risks.

Estimating allowance for doubtful accounts

Companies that issue GAAP-based financial statements are required to include an allowance for doubtful accounts on their balance sheet. This contra-asset account associated with accounts receivable helps reflect the true value of A/R by taking into account receivables that the company doesn’t expect to receive payment for.

Companies usually estimate uncollectible accounts as a percentage of sales or total outstanding receivables. That estimated amount is then recorded as bad debt expense, with a corresponding entry to allowance for doubtful accounts. The AR aging report can help assess whether the allowance appears reasonable.

Reevaluate your credit policies

As you review your receivables aging report, you may notice that certain customers routinely pay 60, 90, 120, or more days past the invoice date. When you notice this trend, you might want to adjust your credit policies for these clients, send credit memos to those clients, start charging interest for late payments, or refer seriously delinquent invoices to a collection agency.

Spot customers with cash flow problems early

Another benefit of the AR aging report is it helps you spot business owners who might be having cash flow problems before they negatively impact your financial health.

For example, say a long-time customer has been paying their amount due within a reasonable period of time for years. All of a sudden, they’re routinely paying their invoices late, and your standard collection procedures aren’t having the desired effect of getting them to pay their bills on time.

To avoid having a customer’s cash flow problems turn into your problem, you might turn that small business into a cash-only customer.

Calculate key performance indicators

One key performance indicator (KPI) for companies that sell on credit is Days Sales Outstanding.

This metric is calculated with the following formula:

Days Sales Outstanding = (Average Receivables/Credit Sales) x Days in Period

This metric helps measure the efficiency of your credit department. If you see this KPI trending upward, you may need to alter your credit policies or rethink making sales on credit.

How to Prepare an Accounts Receivable Aging Report

Preparing an accounts receivable aging report is pretty straightforward as long as you have complete and accurate records of what your customers owe you.

• Step 1: Review open invoices. Start with a list of all outstanding invoices. Your list should include the customer’s name, their outstanding balance, and the number of days each invoice has been outstanding.
• Step 2: Categorize unpaid invoices according to your aging schedule. Companies generally categorize their receivables based on when an invoice is due, based on the following intervals:
  • 0 – 30 days
  • 31 – 60 days
  • 61 – 90 days
  • 91+ days

Your categories will depend on your payment terms. For example, if your industry-standard payment terms call for customers to pay within 90 days, your date ranges might be wider.

• Step 3. Create your report. You can create your report in an Excel spreadsheet, Google sheet, or on paper. Create six columns across the page as follows:
  • Column 1: Customer name
  • Columns 2 – 5: Number of days outstanding based on the aging schedule
  • Column 6: Total

Fill in the columns by entering your customers’ names in the first column, sorting your receivables into days outstanding, and the total due by customer in the far right column.

You can also create a row at the bottom for the total amount due by aging category.

Example of an AR Aging Report

The easiest way to understand how to create an accounts receivable report may be to look at an example.

Without an accounts receivable aging report, it can be difficult to stay on top of your small business financial health.

If you use accounting software, you shouldn’t need to prepare this report manually. Most accounting software includes aging of accounts receivable in its standard reports.

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.