Are you hoarding outstanding invoices? Do you want to know which ones might be at risk and what you should do first?
Whether a sole proprietor or a corporate manager, you know how crucial it is to pay close attention to do payments. You may have to compromise and take a bold move to request the amount owing from your customers.
However, this doesn’t mean you give a free pass to all pending payments. As such, you should check your aged receivable balance and take action accordingly.
What Are Accounts Receivable Aging Reports?
An AR aging report contains details of unpaid customer invoices and unconsumed credit memos arranged according to dates. Collections personnel use aging reports primarily to determine invoices with overdue payments.
Since it is a collection tool, the AR aging reports can be modified to contain details of individual customers. Company management can also use the information to assess the effectiveness of the collection functions and the credit function, as well.
Why Are AR Aging Reports So Important?
Some of the advantages of AR aging reports include:
Provide Crucial Data on Payment Behaviors
Accounts receivable aging reports provide essential information regarding payment behaviors shown by customers. They also help evaluate the efficiency of the collection and credit functions.
Helps Management Payment Expectations
Conducting accounts receivable collections often (ordinarily weekly or monthly) helps organizations manage expectations from customers in terms of payments. It spots cash flow complications before they become significant problems.
Cash flow problems typically arise from customer behavior or AR collection policies. Some customers can be more delinquent than others. So, these reports provide reliable data you can use to take action.
A good example is when a company decides to stop services for customers beyond the payment grace period. Having a balance between service restrictions and grace periods can be achieved through regular AR collections reporting. This makes sure you don’t lose time and money on unprofitable services. You can also leverage an aging report to assess how your clients’ organizations work to ensure you align your invoicing processes with their accounts payable.
Preparing Accounts Receivable Aging Report
An accounts receivable aging report, also known as an aging schedule, is generally prepared by creating a list of customer names, the funds they own to you, different dates, and the total amount owed. It is referred to as an aging schedule because accounts receivable are categorized at time intervals according to due dates.
The mission is to collect more payments once they are due and determine which customers always default on payments. For instance, if you create a report for September 30 and have the invoice due date as September 24, this report will be placed in the “1-15 days” column. This means the balance is due within 15 days and must be collected before September 8.
You can make the following customizations in AR aging report:
- Time frame: View information for the money, quarter, or year
- Due date vs. invoice date: Created reports according to criteria
- Multiple currencies: Group customers according to currency
- Due date intervals: Arrange unpaid invoices into buckets
- Display: See the total outstanding amount or the number of invoices
Using the Accounts Receivable Aging Report
You can use accounts receivable aging reports in numerous other ways other than letting you figure out due payments. Here are different ways you can use the AR aging report:
Project Bad Debts Risk
Some invoices may be long past the due date that is difficult to collect, and you may be forced to write them off. Many other factors could make a payment uncollectable, such as customers being unable to pay back. These invoices are referred to as bad debt and are part of the amount of money you will count as a loss.
You must monitor these bad debts in each accounting period and determine how much they cost you. The aging report can help you get the correct data needed to do so.
Furthermore, you leverage these estimations to revise your policies that are lenient to doubtful customers. For instance, you can compare customers’ past due payments, interactions, and the amount of doubtful debt a customer account has to determine if you need to make adjustments or not.
Typically, the longer debts remain uncollected, the more the chances of not collecting them again. 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.
Identify Cash Flow Problems
You must make sure that customers pay you on time and that they pay you promptly to ensure financial stability for your company. According to Jessie Hagen of the U.S. Bank, 82% of businesses fail due to cash flow mismanagement. Consider this scenario: You receive a large order from a customer that does not pay upfront. You borrow money from banks or investors to purchase the supplies and proceed with product delivery.
You could lose any profits if the customer doesn’t pay you back in time. Knowing how long you can wait before the customer pays is essential. An accounts receivable aging report can help you to identify these scenarios and keep you continuously aware of your company’s cash flow.
Streamline Your Business’s Accounts Receivable Collection Practices
Sometimes your customer may have a different payment cycle than yours, so you might not receive your payments on time. You can adjust your service delivery or the invoice date alerting mechanism so that they match your company’s payment cycle. This will reduce the chances of late payments. An aging report allows you to analyze these scenarios and assess your AR collection processes.
Your current collection strategy may be ineffective if you have multiple accounts extending beyond 60-90 days. It is a good idea to remind your customers about payment terms.
Implementing new practices can help improve your AR collection. These include prioritizing collection efforts, sending reminders for late payments, and increasing in-person communication. This will help your company maintain a healthy cash flow and prevent any cash flow problems.
Evaluate Your Credit Policies
An aging report can quickly assess the effectiveness of your credit policies. For example, if you have pending payments from one customer, it’s evident that the customer is having problems. You should identify why they are delaying payments and possibly use specific collection techniques with this customer.
Notice multiple customers falling behind in their payments. This could be a sign that your credit policy is not working correctly. Take advantage of these events to assess your credit risk relative to the industry standard.
Streamline Your Inventory Management
Aging accounts can help with inventory management by allowing you to decide when to sell your inventory with discounts and when to store it. Additionally, you can see the costs associated with warehousing loss, retail space, and other factors, so you can plan for efficient inventory control to reduce unnecessary expenses.
Accounts Receivable Aging Reports and Invoicing Software
Invoicing software can be valuable for keeping track of all transactions and monitoring your cash flow. All invoices and payment information are stored in the cloud and can be accessed anytime, anywhere.
You can view past-due invoices from your account and add filters to your invoice list to show overdue and unpaid invoices. Also, you can filter invoices for specific customers.
It is easy to download customer account statements that can be sent to your customers. They include details about any outstanding balance and a list containing all invoices associated with that client. Invoicing software can also remind customers when payment is due.
Accounts Receivable Aging Reporting and Automation
Automated reporting functions are supported by many accounts receivable management platforms. This is due to their numerous benefits to an organization’s AR workflows and overall efficiency.
View Reports Instantly
Is your team spending too much time collecting data and creating reports? Automated solutions simplify the process by pulling data and organizing it based on pre-set parameters. This is the easiest way to spend less time creating reports and more time reviewing them.
Accurate Payment Projection
You can easily manage cash flow accounting and behavior monitoring, as well as custom allowances for accounts that are not in your control. Automating the process reduces the human factor, which in turn helps to reduce errors.
Reduce Effort and Reporting Time
Manual collection work can be tedious and time-consuming. This can lead to poor workflow efficiency and frustration for your team. Automate removing unnecessary tasks, so teams can focus on more productive, exciting work.
Businesses use accounts receivable age reports to help with their accounting and bookkeeping processes. Companies use this report to identify outstanding customer payments. Maintaining a healthy cash flow would be extremely difficult without this report.
Also, it may be hard to identify bad credit risks for your company. Monthly accounts receivable age reports can help you regularly identify late-paying customers and stop doing business. This will allow you to stop providing goods and services to clients before late payments cause cash flow disruptions.