InvoiceSherpa Blog
Posted on September 21, 2020

 

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An accounts receivable aging report is an important document for business owners to understand. It’s essential to know the importance behind an AR aging report, how to read one, and how to prepare one. Let’s find out all of this and more in this article.

 

What is an AR Aging Report?    

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.

In short, an AR aging report is designed to keep all of your unpaid invoices in one place, while also identifying clearly how long they’ve been outstanding. As a business owner, this is a crucial report to understand, as it allows you to stay on top of late payments and slow customers.

 

How do you Read an Accounts Receivable Aging Report

It’s a good practice to read and review your accounts receivable aging report at least monthly. This will allow you to have a quick overview or how much money you are missing from your customers and just how late it is. Each aging report has standard categories that allow you to visualize what exactly is going on with your accounts receivable.

Here’s a simple guide to reading your AR aging report:

 

AR-report

Current: invoices that have been issued and are due soon or immediately.

1-30: totals that are past due one day up to 30 days

31-60: totals that are one month overdue

61-90: totals that are two months overdue

91+: totals that are over two months overdue

 

Why is an Accounts Receivable Aging Report Important? 

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.

 

How to Prepare Aging Report in Excel

 

Excel is a tool that can be used to create your own accounts receivable aging report from scratch. To do so, you can use templates to ensure you have all the right formulas and columns. We’ve included a basic step-by-step to get your accounts receivable aging report started on Excel:

  1. Start with all the basic information about your customers, orders, and amounts. Fill in Customers: A1, Order Number: B1, Date: C1, and Amount Due: D1. Under each column, fill in all the information.
  2. Add additional information that is essential in an aging report. In the following columns, include: Days Outstanding and categories for each time period (0-30, 31-90, etc.)
  3. Now that your accounts receivable report is set up, it’s time to use Excel formulas in order to automate the whole thing.
  4. To see how many days have gone by for an unpaid invoice, enter the following formula in E2: =IF(TODAY()>C2,TODAY()-C2,0). Make sure that this formula is dragged through the whole column, applying to every customer.
  5. In F2, enter the following formula: =IF(E2=0,D2,0). This will show you any customers who have no days outstanding. These are the invoices that are not yet due.
  6. For 0-30 days: enter =IF(C2<TODAY(),(IF(TODAY()-C2<=30,D2,0)),0) in cell G2.
  7. For 31-60 days: enter =IF (AND(TODAY()-$C2<=60,TODAY()-$C2>30),$D2,0) in cell H2.
  8. For 61-90 days: enter =IF(AND(TODAY()-$C2<=90,TODAY()-$C2>60),$D2,0) in cell I2.
  9. For 90+ days: enter =IF(TODAY()-$C2>90,D2,0) in cell J2.

 

How to Prepare Aging Report in Quickbooks    

Quickbooks is another great tool in which you can create an accounts receivable aging report. While you have to create one from scratch if you’re using Excel, Quickbooks allows you to do so easily with the reporting already set up. Here’s a step-by-step guide to viewing your aging report in Quickbooks Online:

  1. Go to Reports
  2. From the Recommended Reports tab, select A/R Aging Summary
  3. Here, you will have several options that you can customize. Specify the Reporting Period and Days per Aging Period and then click on Display 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.