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Accounts receivable (AR) aging reports can be done by hand using spreadsheets, but some types of digital accounting programs include AR reporting software. — Getty Images/Luis Alvarez

An accounts receivable (AR) aging report is a management tool that outlines a company’s receivables over a period of time alongside outstanding invoices or credit memos. Businesses can use an AR aging report to determine the financial stability of their income as well as the reliability of their consumer base.

If a business runs an AR aging report and finds its receivables are growing significantly slower than usual, this may signify a decreased revenue or an increase in bad debts. An AR aging report also helps businesses keep track of the money they still haven’t received from customers and improve their financial health.

How does AR aging work?

An AR aging report is broken up into columns separated by date range, usually in 30-day, or monthly, increments. The final column shows the total amount of receivables due and the current total amount paid, while the line-by-line items separate individual customer payments. An aged receivables report is especially useful for businesses that find they have multiple customers with outstanding receivables.

Importance of AR aging reports

An AR aging report allows businesses to analyze when customers pose a credit risk to the business because they are prone to delaying or skipping payments. Businesses can use this data to decide whether they would like to continue working with these companies or individuals. AR aging reports are typically utilized in-house; however, they may have external usages. For example, the information from an AR aging report can be sent to collection agencies to receive overdue payments from clients.

Through AR aging reports, businesses can also see if these outstanding payments are creating gaps within their cash flow, which can cause trouble in the future. Additionally, businesses can use this data to choose a proper grace period suitable for their customers before cutting off services due to late payments.

[Read more: Accounts Payable vs. Accounts Receivable: What's the Difference?]

Businesses can use an AR aging report to determine the financial stability of their income as well as the reliability of their consumer base.

How to use an AR aging report

Follow these five steps to create an AR aging report.

  1. Collect all of your invoices and identify those with outstanding balances.
  2. Group these invoices by how long they have been overdue and keep track of the total amount of receivables due.
  3. Either generate your AR aging report in a spreadsheet or integrate your accounting software with AR reporting software.
  4. If using a spreadsheet, create columns with headings for client name, accounts receivable, 0–30 days, 31–60 days, 61–90 days, and over 90 days.
  5. Fill in each of the columns by the age of each invoice.

A few ways to use an AR aging report include:

  • Determining an average collection date: You can calculate the average collection period through the following formula: [(Number of collection days x Average AR) / Total credit sales]. The subsequent ratio shows how long it takes consumers to pay receivables and allows you to determine if you need to revisit your payment terms or contact collections.
  • Reevaluating credit policies: If businesses find they are having cash flow problems due to outstanding invoices, businesses may choose to provide their goods and services on a cash-only basis and deny credit to pay for services. Businesses can also change payment terms and extend payment periods by a chosen number of days.
  • Strategizing collections: If you find your business has outstanding invoices over 90 days, consider developing stricter collection requirements. AR aging reports can even be given to collection agencies with whom businesses can work to choose the best collection policies for their needs.
  • Estimating allowances or bad debts: You can use an AR aging report to estimate what payments you may never receive from a company (for reasons that can include bankruptcy and the company rejecting collections payments). You’ll need to account for these bad debts in financial reports and write them off so you are not adding a nonexistent payment to your balance sheet.

[Read more: Accounting Basics Every New Business Owner Should Learn]

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