What is an Accounts Receivable Aging Report?

What is an Accounts Receivable Aging Report?

Accounts receivable aging (tabulated via an aged receivables report) is a periodic report that categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding. It is used as a gauge to determine the financial health of a company’s customers.

An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos sorted by date ranges.

On a balance sheet, the aging report represents the money customers owe to your business for purchased products or services. They are commonly used in short-term credit payment structures when customers make credit payments on a large purchase over a short period.

How to Use an Accounts Receivable Aging Report?

One must start by looking at the largest balances and understand if the amounts are within the specified credit period or if they have been outstanding for a longer time. The user can also consider using the Pareto Principle, or the 80/20 Principle, which states that about 80% of the effects come from 20% of the causes, i.e., 80% of the amounts overdue may be attributed to 20% of the customers.

Uses of the Accounts Receivable Aging Report

For Management:

The accounts receivable aging report can be used by management in different ways, including the following:

  • Understanding the speed of collection of receivables from customers
  • Understanding the financial health of customers
  • Estimating allowance for doubtful accounts

The report also serves as a basis for management to adjust the credit period for customers and incentivize customers to clear their outstanding dues by giving cash discounts for early payments.

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For External Stakeholders:

The accounts receivable aging report can be used by various external stakeholders. For example:

  • Lenders of the company can use the report to assess the company’s short-term solvency and working capital requirements.
  • Investors (equity and preferred) can use the report to evaluate both the short-term and long-term solvency and quality of the company’s customers.
  • In some cases, even tax authorities use the receivables aging report to learn more about the sales cycle and repayment timeline of the company’s customers. They also check whether the policy for calculating the allowance for doubtful accounts is in line with the credit policy.

Why are accounts receivable aging reports important?

Accounts receivable aging reports are important because they can help businesses keep track of outstanding payments from customers. As a business owner, the last thing you want is to sell your products or services and never get paid. That’s why you must always stay on top of your finances and keep track of who owes you to maintain your company’s financial health.

Late payments can be problematic for many reasons. One significant issue with late payments is that they can disrupt a company’s cash flow. In fact, a 2020 survey showed a year-over-year 32% increase in the number of businesses that couldn’t pay suppliers due to clients’ late payments.

An accounts receivable (A/R) aging report lists unpaid customer invoices by date ranges. With this report, you’re able to look at which customers owe money and how behind they are on payments. There are many benefits of using accounts receivable aging reports, and they can be the difference between success and failure.

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The advantages of using an accounts receivable aging report

The main benefit of using aging reports is to identify how much money is owed to the business and is past its due date. From there, management can make decisions based on certain customers payment patterns to ensure that you’re on top of your billing and collections.

Overdue payments will affect your company’s cash flow. If a customer is paying their balance late on a regular basis, your business can evaluate whether to sever ties with that customer altogether, or to reevaluate their payment terms.

Essentially, aging reports will help the management team understand why payments are late and come up with a plan to make sure this doesn’t happen in the future and affect the cash flow.