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| Image: Moneybestpal.com |
Accounts receivable aging is a technique that helps businesses manage their cash flow and credit risk. It entails classifying past-due client invoices according to how long they have been overdue and then taking the necessary steps to either collect them or write them off.
Why Is Accounts Receivable Aging Important?
Accounts receivable aging is important for several reasons:- It aids companies in keeping track on the well-being and dependability of their clients. It may be a sign of financial difficulty or dissatisfaction with the goods or services if some clients pay their invoices late or not at all. This can assist firms in determining whether to send them to collections agencies, continue doing business with them, or provide them discounts or other incentives.
- Businesses might use it to estimate the allowance for shaky accounts. The company must make the necessary adjustments to its financial statements for the amount of accounts receivable that it does not anticipate collecting. Businesses can determine how much of their accounts receivable are likely to be uncollectible by applying a predetermined percentage of default for each age category, and they can record that amount as a bad debt expense.
- It aids companies in increasing their liquidity and cash flow. Businesses may more correctly estimate their cash inflows and focus their collection operations by knowing which invoices are past due and by how much. This can assist them in avoiding cash problems, creating a budget, and making more effective use of their extra cash.
How To Create an Accounts Receivable Aging Report?
An accounts receivable aging report is a table that lists the specifics of each unpaid invoice and groups them according to how many days they have been past due. The report typically includes a total column, 0–30 days, 31–60 days, 61–90 days, and above 90 days. Also, the report displays each invoice's customer name, invoice number, date, and amount.To create an accounts receivable aging report, follow these steps:
- Get all the unpaid invoices as of a particular date, such as the conclusion of a month or a quarter.
- The invoices should be sorted by client name and invoice date.
- Depending on how many days an invoice has been past due, classify them into one of the age categories.
- Add the totals of each invoice in the total column and for each age category.
- Determine what proportion of the total amount of accounts receivable belongs to each age group.
An example of an accounts receivable aging report is shown below:
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- 0-30 days: ($1400 /$3900) x 100% =36%
- 31-60 days: ($900 /$3900) x 100% =23%
- 61-90 days: ($900 /$3900) x 100% =23%
- Over 90 days: ($700 /$3900) x 100% =18%
How To Use an Accounts Receivable Aging Report?
An accounts receivable aging report can be used for various purposes, such as:- Determining potential problematic debts and assessing the creditworthiness of consumers. One sign that a client is unlikely to pay their debt and may need to have it written off or sent to collections is if they have a lot of invoices that are more than 90 days past due.
- Establishing and modifying credit terms and procedures for customers. For instance, a customer may be given longer credit terms or reduced interest rates if they have a history of paying their invoices on time. On the other hand, a client may be asked to pay in advance or provide collateral if they have a history of paying their invoices late or not at all.
- Improving collection methods and tactics and allocating resources appropriately. A polite reminder email or phone call might be issued to a client if they have a few invoices that are due in the next 30 days, for instance. It is possible to send a final demand letter or have a collection agent contact a customer if they have numerous invoices that are more than 90 days overdue.
