Today you’ll learn how to read accounts receivable aging report.
An accounts receivable aging report is a vital tool for businesses like yours to keep track of unpaid invoices and assess the overall health of your accounts receivables.
By analyzing this report, you can make informed decisions about collections, identify potential risks, and improve your cash flow management.
In this article, we will provide you with a step-by-step guide on how to read and interpret an accounts receivable aging report.
1. Understanding the Basics
Start by familiarizing yourself with the basic structure of an accounts receivable aging report.
This report organizes outstanding customer invoices based on the length of time they have been outstanding.
You will find categories or time buckets such as 0-30 days, 31-60 days, 61-90 days, and so on.
Each category represents the number of days an invoice has been unpaid from the invoice date.
2. Analyzing the Current Column
Pay close attention to the current column in the accounts receivable aging report.
This column shows invoices that are within the payment terms and are yet to become overdue.
It is the largest section of the report, representing the total value of invoices due within the specified timeframe.
You need to monitor this column closely, as an increase in the value of current invoices can indicate a healthy cash flow situation for your business.
3. Assessing the Aging Buckets
Now, let’s dive into each aging bucket included in the report. Begin with the 0-30 days column, which covers invoices that have recently become overdue.
If you notice a significant value in this column, it may indicate slow-paying customers or potential payment issues.
Take this opportunity to analyze the other aging buckets as well.
Higher values in longer-aged buckets may signify a higher risk of non-payment or customer disputes.
4. Identifying Problematic Customers
As you review the individual accounts mentioned in the report, you can easily identify customers who consistently delay payments or have a history of late payments.
Pay close attention to customers who appear frequently in the higher aging buckets, as this may suggest a credit risk.
Discuss these accounts with your collections team to develop appropriate actions, such as escalating collections efforts or adjusting credit limits.
5. Calculating Percentage of Total
To evaluate the overall financial health of your accounts receivable, you can calculate the percentage that each aging bucket represents about the total value of outstanding invoices.
For instance, by dividing the total value in the 0-30 days column by your overall accounts receivable balance, you will obtain the percentage of current invoices.
This analysis will help you understand the distribution of overdue invoices compared to your total outstanding receivables.
6. Tracking Overdue Invoices
In addition to understanding the distribution of aging buckets, you must track individual overdue invoices.
Look for patterns, such as certain customers consistently delaying payments or invoices related to specific products or services being more frequently overdue.
This analysis can inform your credit terms, pricing strategies, and customer selection processes, enabling you to make informed decisions to support your business growth.
7. Identifying Opportunities for Improvement
Use the accounts receivable aging report as a tool to identify areas where your business processes can be improved.
Focus on the aged invoice column and consider ways to prevent these delays.
Explore options such as adjusting payment terms, offering discounts for prompt payments, or reinforcing your collections process.
By identifying areas for improvement, you can enhance your cash flow management and reduce the risk of bad debts.
8. Reviewing Collection Strategies
The accounts receivable aging report can also help you evaluate the effectiveness of your collections strategies.
Assess whether your current efforts are achieving the desired results or if adjustments need to be made.
For example, if a significant portion of your receivables consistently falls into the 90+ days column, it might be time to consider more aggressive collections measures or seek third-party assistance to expedite payment.
9. Regularly Monitoring the Report
To ensure ongoing control and management of your accounts receivable, you must regularly review and monitor the aging report.
Establish a schedule, such as weekly, bi-weekly, or monthly, to analyze the report.
This will enable you to detect trends, take prompt corrective actions, and maintain a healthy cash flow.
Additionally, share the report with relevant stakeholders, such as your finance team or advisors, to foster collaboration and ensure timely decision-making.