This report should be reviewed at least once per month (or even bi-weekly) to make sure your customers are paying you on time—if at all!
The good news is you don’t have to be a CPA to run or analyze these types of reports. Follow this quick guide below to learn how to prepare, read, and use an accounts receivable aging report.
What Are Accounts Receivables?
You now know that accounts receivables refer to the invoices or amounts that are due to you by your customers. You will likely notice that accounts receivables show up on your company’s balance sheet as assets. Accounts receivables have value as the total amount owed to your business (even though they may not have been “received” yet). As soon as the receivables are paid, they become cash.
Businesses that rely on credit cards as a primary form of customer payment may not have many receivables. However, if your business bills customers invoices with payment terms (such as Net 30, Net 60 or Net 90), then it’s important to run accounts receivables reports to monitor payments sent and received over time, the amount of money owed to you, and the timeframe in which they are due (or past due).
What is an Accounts Receivable Aging Report?
The report that business owners need to run and analyze on a regular basis is known as the Accounts Receivable Aging Report. This is also often referred to as “Accounts Receivable Reconciliation”. This report categorizes how much is owed by all customers, including how long invoices have been outstanding (or the “age”).
Some examples of “aging” factors include the following:
- Current – Due “on receipt” (or due immediately)
- 1 – 30 days – Due within 30 days
- 31 – 60 days – 1 month overdue
- 61 – 90 days – 2 months overdue
- 91 and over – More than 2 months overdue
The Accounts Receivable Aging Report is a standard report that users can prepare with most business accounting software systems. The purpose of this type of report is to show business owners which receivables are overdue and which customers or accounts need immediate attention or require collection.
How to Read an Accounts Receivable Aging Report
Now that you have a better understanding of what accounts receivables consist of and why accounts receivables reports are important, here is how to prepare and read an account receivable aging report.
- First, organize or filter the report to show the greatest amounts of money owed by all customers. Are these amounts current? Are they due in 30 days or longer? Are there any amounts that are outstanding? Focus on collecting the largest amounts due by deferring to your collections system or by making phone calls. Focusing on collecting the highest payments will obviously bring you the highest return.
- Second, look at the receivables that have been due for a lengthy period of time. Again, either defer to your collection system or if this hasn’t worked, then determine next steps, such as small claims court, repossession or writing the amount off.
- Finally, as mentioned above, defer to your collections system in the attempt to contact those customers with overdue bills. If you don’t have a collection system setup, then it may be time to establish one. A collection system can involve making phone calls, sending emails or “snail mail” correspondence or even discussing legal options with an attorney.
Note: Of course no business owner enjoys making collections calls to customers. As a general rule, be sure to consider the circumstances of each of your customers.
For example, if you notice a customer is overdue on his bills, but you also know that this particular customer lost his job and just lost a spouse, then maybe you allow him more time to catch up on his bills. The point here is to let your system guide you in these situations.
Tthe accounts receivables aging report isn’t designed to make you feel like a “bad guy”, however, it will help you monitor your “average collection period”, which is the average amount of time (in days) that it takes to collect business receivables. If you monitor this number over time, you will be able to determine if it goes up or down. If the amount of time goes up, then it may be time to revisit your collections system or even your payment terms.
If you take the time to run and analyze your accounts receivable aging report, then you will be able to improve your collections rate as well as perform other in-depth financial analyses, enabling you to make more informed financial decisions for the future of your business.