Fine wine gets better with age. Your Accounts Receivable do not. What is an Accounts Receivable aging report, and what does it mean?
First of all, your Receivables are the amounts that your customers owe you. An unpaid invoice is a Receivable. All of your unpaid customer accounts make up your Accounts Receivable. The aging report gives you a picture of how much is owed and how long it has been owed to you. Let’s take a deeper dive into that report.
In most software programs, your Accounts Receivable aging report will look like this:
This report gives you an overview of how much money you have outstanding from your customers and how late it is.
- The Current column shows you those invoices that have been issued to your customer but are not due yet.
- In the 1-30 column, you see the totals that are past due one day up to 30 days.
- The 31-60 column is for amounts past due 31 days up to 60 days, and so on.
The Accounts Receivable aging report is one of the most valuable reports a business owner can study regularly. Here are some of the main reasons why:
Difficult Collections: Which customers fall regularly into the far right column? Those are the ones from whom you have the most difficulty collecting your money. When you can identify them, then you can do something about it – add late fees, send collection letters, make phone calls, even take them to court. You may also decide that anyone who pays you that slowly is not worth having as a customer. Concentrate on taking care of the customers in the far left column. Those are the ones who pay on time – or even early! Let the others go.
Extending Credit: If you have a high volume in that right column, perhaps you need to look at your credit policies. Are your credit terms too lenient? Maybe your sales team sacrifices easy payment in the interest of making the sale, but what good is a sale if you don’t get the money?
Projected Cash Flow: The aging report can show you how much money is “out there” waiting to come in. If you know what to expect from your customers, you can get a good idea of how much cash you’re about to collect. If your cash reserves are low, this report can show you which customers to call on to build them back up. Cash Flow on paper isn’t much help if it never gets into your bank account.
Identify Bad Debt: Especially at the end of your fiscal year, you want to determine which Receivables will never be collected. Unfortunately, it does happen. But if you report on an accrual basis, at least you can write it off to Bad Debt Expense. Those will most likely be the one on the right side of the report.
Determine Cash Only Customers: Maybe you want to keep those customers, just not their balances. Consider making them Cash Only. If your customer pays you on delivery, you don’t have a Receivable. Again, money in the bank beats money on paper.
Identify Your Risk: What would be the consequences if those amounts are never paid? Would your business survive? A regular look at this report can help you manage risk. Control these Receivables before it’s too late. If that number is creeping dangerously high, then you know it’s time to hit the Collections hard.
Unused Credit Memos: On the above Aging report, we see a couple of entries with negative signs. That means the customer has credits that have never been used. Either they erroneously over paid, or they were issued a credit memo that they didn’t take. You can apply those credits to any open balances in that Customer’s account.
Potential Cash in the Bank: My favorite thing about the Accounts Receivable aging report is seeing how much money is available to be on it’s way to my bank account. While that’s fun to know, I’m much happier when the money comes in than when I see it on this report.
The best way to move that money from the paper to the bank is to use a great Accounts Receivable management program. InvoiceSherpa answers that call. With automated email invoices, reminders and thank you letters, InvoiceSherpa has a proven track record to collect your Accounts Receivable 50% faster.
Use InvoiceSherpa to manage your Accounts Receivable, and you can stop watching them age. Buy a nice bottle of wine instead!