Cash flow health and business health go hand-in-hand. That’s why it’s useful to look closely at your accounts receivable (AR) function for any opportunities you can find to improve cash flow management. The AR aging report provides an extremely useful tool in this process. By using AR aging as part of your advanced reporting toolkit, you can understand how long it takes customers to pay, quickly spot overdue accounts and take action when needed.
This article explains what AR aging is, why it matters and how you can create and interpret an AR aging report. We will also look at how automation and reporting tools can make this process faster and easier than today’s manual and spreadsheet-driven methods.
What is an AR aging report?
An AR aging report provides a breakdown of overdue invoices for a given period and shows you how long, on average, it takes your customers to pay for goods or services. The report groups unpaid invoices by how long they’ve been outstanding, typically in 30-day increments:
- 0-30 days: Current invoices that are not overdue
- 31-60 days: Slightly overdue invoices
- 61-90 days: Moderately overdue invoices
- 90+ days: Significantly overdue invoices, often requiring immediate action
This report helps you identify any accounts that are late on payments, understand how much money is tied up in overdue invoices and visualize late payments across different time periods. It also gives your finance team the information needed to make any adjustments to your collections process
What does an AR aging report look like?
The example of an AR aging report below shows the status of invoice payments for several fictitious companies:
What can we learn from the AR aging report?
The AR aging report provides more than just a snapshot of aged receivables – it’s a key tool for managing customer relationships, cash flow and credit policies. Here are some of the insights you can find in an AR aging report:
Identify high-risk accounts
By regularly monitoring accounts that consistently fall into the 60-90+ day categories, you can spot customers who may pose a credit risk. For these customers, you may decide to tighten payment terms, adjust credit limits or take a more aggressive approach to collections to prevent bad debt.
Analyze payment trends and forecast cash flow
By reviewing payment trends in the AR aging report, you can gain valuable insights into your future cash flow. For example, a rising number of overdue invoices can signal cash flow shortages in the coming months. You can use these insights to adjust your cash reserves or adapt collection strategies to mitigate potential issues.
Segment customers for tailored collection strategies
Not all customers pay on time and the aging report helps you manage this reality. Segmenting customers based on their payment history and behavior lets you develop tailored approaches to collections. For example, frequent late payers might need earlier reminders or stricter follow-ups, while occasional delayers may only require periodic check-ins.
Adjust credit policies based on aging report data
The AR aging report can be a powerful tool for adjusting credit terms too. You can use it regularly to review overdue accounts and modify credit terms for customers who are frequently late on payments. On the other hand, for the reliable payers, you might want to offer them more favorable terms to strengthen the relationship over time.
Make strategic business decisions
Beyond collections, AR aging reports can inform broader business strategies. Based on the insights the report provides, you might decide to focus on expanding relationships with your most reliable customers or allocate more resources to improving collections if late payments are starting to hurt your cash flow.
How to create an AR aging report
Creating an AR aging report involves gathering data from your accounting or ERP system. Here are the steps:
- Collect invoice data: Pull customer invoice information from your system, including issue dates, due dates and amounts owed.
- Categorize by age: Group the invoices by their age into the standard intervals (0-30 days, 31-60 days, etc.).
- Summarize: Add up the total outstanding amounts for each age category to get a clear view of overdue balances.
Instead of manually creating AR aging reports using spreadsheets, you can use automated tools like ZoneReporting to integrate real-time data directly from NetSuite into PowerBI and create hundreds of valuable financial reports.
Emerging trends: automation in AR aging
Advanced reporting tools like ZoneReporting transform accounts receivable management by providing real-time insights, automating reporting and reducing manual data entry, which improves cash flow visibility. To compound these benefits, you can integrate automation capabilities natively within your ERP system. Below are several ways you can leverage automation to improve the timeliness and accuracy of your AR aging data – and gain valuable insights from your AR aging reports.
Seamless integration with ERP systems
One of the key advantages of advanced reporting and BI tools is their ability to integrate directly with ERP platforms such as NetSuite. This integration allows finance teams to automatically pull real-time data from the ERP into the reporting system and generate up-to-the-minute reports without manually transferring or updating data. By leveraging ERP integration, you can gain a unified view of your business’s financial health, with the added benefit of reducing errors from siloed data.
Automated reporting and alerts
By setting up automated AR aging reports within tools like ZoneReporting, you can stay ahead of invoices nearing due dates or reaching certain aging thresholds. You can then signal your financial team to take action to prevent overdue accounts from becoming bad debt.
Customized reports and dashboards
Advanced reporting solutions can help you automatically segment your AR aging reports by customer type, age category or industry. With this customization, you can manage your receivables efficiently and effectively while making informed decisions regarding credit terms and collections.
All of these automation features, combined with seamless ERP integration, allow your business to reduce time spent on manual processes, minimize errors and improve overall cash flow by providing real-time insights into aged receivables. With automated tools like ZoneReporting, you can focus more on optimizing your collections and financial planning, all within a fully integrated financial ecosystem.
AR aging is just one of many key financial reports that C-Suite executives want to see automated. These are the top 10 reports our customers find most valuable.
FAQs
How do you create an accounts receivable aging report?
To create an AR aging report for a given customer, first, gather each invoice for the customer and note the amount due and invoice date. Then create a table that classifies each invoice amount in 30-day increments (e.g. 0-30 days, 31-60 days, 61-90 days and 91+ days). Repeat this approach for all customers, total the amount due for each 30-day bucket and apply a percentage of the total to it. While some companies use spreadsheets to create AR aging reports monthly, tools like ZoneReporting can produce these reports with a single click whenever they’re needed.
What is a good AR aging percentage?
A good AR aging percentage can vary widely by industry. However, businesses generally aim to keep overdue receivables as low as possible. The Dunn & Bradstreet Accounts Receivable Industry Report provides insights into average overdue percentages across industries. According to their data, overdue percentages can range significantly, with some sectors maintaining an average below 10%, while others, such as construction, may see higher percentages.
How do you calculate AR aging days?
AR aging days, sometimes called average collection time, is calculated using the following formula: AR aging days = (average accounts receivable × 360 days) / credit sales. This formula outputs the average number of days it takes customers to pay their invoices. By knowing how to calculate AR aging days and tracking this metric over time, you can establish a useful guide for determining when you need to adjust to payment terms or collections practices.
Why is the accounts receivable aging report important?
The AR aging report is crucial for managing your company’s cash flow and maintaining its financial health. It gives your business visibility into how much money is tied up in unpaid invoices and how long those invoices have been overdue. It also helps your finance teams identify problematic accounts and adjust their collection strategies accordingly.
What is an accounts receivable aging schedule?
An AR aging schedule is a detailed breakdown of all outstanding receivables categorized by how long they’ve been overdue. It typically divides invoices into buckets such as 0-30 days, 31-60 days, 61-90 days and over 90 days. The AR aging schedule is essential for managing your overdue receivables and prioritizing your collections efforts.
Conclusion
Effectively managing accounts receivable is critical for maintaining a healthy cash flow, and that’s why AR aging is important to understand. The AR aging report provides a clear picture of aged receivables, helping you prioritize collections and identify high-risk accounts. By understanding the age of outstanding receivables, you can take proactive steps to minimize late payments, improve credit terms and ultimately strengthen your business’s financial position.
Are you ready to learn more about how ZoneReporting can help you take control of AR aging and transform your financial operations? Talk to one of our experts today.
