How to Prepare and Use an Accounts Receivable Aging Report
An accounts receivable aging report is an important report to review at least monthly, or more often, to be sure your customers are paying you.
What are Accounts Receivable?
Accounts Receivable (sometimes called "receivables" or "A/R") are those amounts owed to a company by its customers. You might consider them as "payments due to my business."
Receivables are considered a business asset because they have value, as the total amount owed to your business.
Receivables are ranked high in the list of assets because of their ability to be converted into cash. Accounts receivable show up on the company's balance sheet, because these amounts owed are considered as assets. As soon as they are paid off - we hope - they will become cash.
Some cash businesses or businesses that rely heavily on customer use of credit cards may not have many receivables. But if you have a business in which you bill customers and you offer them terms (payment over time, you'll need to be able to run an A/R aging report allows you to see what is due from each customer.
Accounting Method and Receivables
If your business has customers who don't pay immediately, you are probably using the accrual accounting method (as opposed to cash accounting). This accounting method recognizes income when it's billed, not when the money is collected. That means you must pay tax based on income which you may not have received.
The process of collecting money from customers in this type of business begins with an invoice - a bill to a customer. The invoice states the amount due and when it is due, including terms of payment. The payment terms sometimes include a discount for early payment.
The accounts receivable report is based on the amount and terms stated in the invoice for that customer.
What is an Accounts Receivable Aging Report?
Accounts Receivable Aging (sometimes called an accounts receivable reconciliation) is a process of categorizing all the amounts owed by all customers, including the length of time the amounts have been outstanding (unpaid), thus you are considering their age, or "aging" this information. The standard categories for this type of report are:
- Current - due immediately
- 1 - 30 days - due within the next 30 days
- 31-60 days - a month overdue
- 61 - 90 days - two months overdue
- 91 and over - more than two months overdue
If a customer has several bills that were incurred at different times, the report will show how much is due at what time. For example, for Jim Jones:
- $230 30 days
- $120 60 days
- $390 Over 90 days.
The purpose of this accounts receivable aging is to show the business owner what receivables need to be dealt with more urgently because they have been overdue longer.
The Accounts Receivable Aging Report is a standard report provided with all business accounting software programs, including online systems.
Why is An Accounts Receivable Aging Report so Important?
Rule #1 in debt collection is "The longer a debt is owed, the less likely you are to be able to collect it." So, knowing about your customers and their debts is vital to collecting from them.
One of your most important debt collection tools is an accounts receivable aging report.
How Do I Read and Use An A/R Aging Report?
Read an accounts receivable aging report remembering Rule #1 of Collections/ Here are some guidelines to consider when reading an a/r aging report:
First, look at the greatest amounts of money owed by all customers. Are these amounts current? Are they 30 days? Or have these bills been outstanding for 120 days or more? Working on the 80/20 principle, going after the biggest offenders (using your collections management system, of course) will bring you the highest return. Determine how you will handle each of these large bills, write up a plan, and have your accounts receivable manager start working.
Next, look at those bills which have been due for a long time. Determine whether you are ready to take this customer to the next step of the collections process: collections agency, or small claims court.
Or do you think this bill is un-payable?
Finally, use your collections system to determine how you will contact all customers with bills 30 days overdue or more. Let the system guide you, but don't hesitate to make exceptions. For example, you might know that a customer's wife has terminal cancer, and you might decide not to take that person to court. It is your company; you get to decide.
You might also want to calculate a business analysis ratio called "average collection period." This calculation show the number of days, on average, it takes to collect on your business sales. Over time, you can see if this ratio goes up (taking a longer time to collect.)
If you work to improve your collections rate, using the accounts receivable aging report and other financial analysis tools like the average collection period, you can improve payments and have more cash in your business.
In conclusion, you can use an accounts receivable aging report to make decisions on next steps for all customers who owe you money. Use the collections process you set up, and always remember Rule #1.