Accounts Receivable (AR) Aging Reports are periodic tabulations of a business’s accounts receivables categorizing them into lengths of time since an invoice had been outstanding. It is a management tool that aids in evaluating the financial stability of businesses and the reliability and creditworthiness of their customer base. This report helps companies to look out for invoices that are still outstanding and track their collection efforts.
An accounts receivable aging report helps businesses determine which accounts to send to collection agencies, which to follow up for due payments, and which accounts to categorize as uncollectible and soon to be written off.
How to create an AR aging report:
Here are the five steps necessary to create an AR aging report:
Collecting invoices and marking those with an outstanding balance.
Grouping invoices by the number of days they have been overdue and knowing the total amount of receivables due.
Generating AR aging reports on a spreadsheet (manually or Excel), or using an AR aging report software.
Creating a table with customer names on the first column, accounts receivable on the second, and the number of days (usually by the 30s) on subsequent columns.
Filling the columns by the age of each invoice.
How can small businesses benefit from the use of AR aging reports?
1. Computing for average collection date
The average collection period can be determined using the formula:
[(Number of collection days x Average AR)/ Total Credit Sales]
The average collection date reveals how long it takes consumers to settle accounts. From the results, businesses may reassess payment terms and reevaluate collection methods.
2. Revising credit policies
The longer it takes for outstanding invoices to be settled, the greater the likelihood that businesses may encounter cash flow problems. Companies need to reevaluate their credit policies and may have to stick to a cash-only mode of payment if the cash flow situation is dire. On the other hand, if an enterprise has a healthy AR aging, it may consider extending payment periods to entice more customers.
3. Determining collections strategy
AR aging reports weigh the effectiveness of a business’ collection efforts. If the aging report yields a significant number of older receivables, this means that collection efforts need to be improved. Businesses should follow up on outstanding debts immediately once they become due. Aging reports may also help enterprises to reevaluate if they need to adjust credit periods or give incentives to customers to settle their accounts earlier.
4. Projecting for bad debts
Aging reports help estimate the number of receivables that are not expected to be collected. Bad debts need to be accounted for in financial reports and need to be written off to avoid adding non-payments to the balance sheet.
5. Identifying credit risks.
Accounts Receivable aging reports identify which customers are likely to become credit risks to the business. The longer an invoice is overdue, the bigger the chance of it becoming a bad account. If the report reveals that some customers are having difficulty settling accounts on time, all the time – management may consider reviewing its billing policy or simply stop doing business with problematic customers altogether.
Accounts Receivable aging reports give businesses a way to determine if they are taking on more credit risks than they can handle. AR aging reports have become indispensable for reevaluating credit policies and collection practices.
AR aging reports determine if an enterprises’ receivables are being collected much slower than normal. This may serve as indication that business may be slowing down or that the business is taking greater credit risks in its sales practices. Tracking AR aging reports on a weekly or monthly basis will help businesses identify patterns of irregularities before they escalate into full-blown cash flow problems. Vigilance and Diligence can go a long way.
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