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The 2022 Accounts Receivable Aging Guide

We’ll discuss the tool companies use to manage delayed payments and mitigate potential damage to their cash flow: the Accounts Receivable (A/R) Aging report.

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Team Maxio

February 11, 2022

There’s a reason most late payments are rewarded with fines: cash is king, and companies need to know when they can expect to be paid. The longer a bill remains unaddressed, the higher the risk of nonpayment. In this post, we’ll discuss the main tool companies use to manage these delayed payments and mitigate potential damage to their cash flow: the Accounts Receivable (AR) Aging report.

What Does an Accounts Receivable Aging Report Communicate?

The accounts receivable aging report summarizes how long invoices have been unpaid based on predefined buckets, often 30 day increments as of the report date. This helps gauge the collectability of a company’s unpaid receivables. 

 Logically, if your customers signed a contract with you, there was an intent to pay, and significant delay between invoicing and payment is often a sign of big problems (customer financial instability, product quality issues, implementation delays, etc.). After all, delaying cash outflow is the final lever a customer has when things aren’t going so well.

The Benefits of Maintaining and Periodically Running your A/R Aging 

There are quite a few benefits to your company keeping an A/R aging:

 First, the aggregation of aging data across customers allows you to assess the risk within your A/R balance. If a customer’s average Days Sales Outstanding (DSO) is on the rise, it’s probably time to evaluate the terms of their payment.

 If many customers’ DSO are trending upwards, revisiting credit terms and policies should be in your future (think: interest, late payment fees, or early-payment discounts). This allows clients to review and plan to pay their invoices within a specific time period, which can be especially helpful to smaller businesses with less capital.

Additionally, the aging of accounts receivables will help you identify potential delays in the company’s cash flow. By uncovering potential credit risks, you can take preventative measures to protect yourself from more risky customers.

AR aging reports also allow you to make strategic decisions when it comes to collecting payment. For instance, if your customers aren’t paying until the 60-90 day mark, it’s time to consider new collection methods or maybe even enlist a collection agency. 

And finally, the information in an A/R aging report shows your company’s receivables whose collectability is in doubt, and thus would warrant a write-off to the company’s bad debt expense.

What is the A/R Aging?

The A/R aging shows the due dates (and past-the-due-dates) of unpaid customer invoices. This table helps you visualize how many invoices are outstanding and which are late.

How to Calculate Accounts Receivable Metrics

A major metric which would indicate receivables aging is an increase in the Days Sales Outstanding (DSO). The DSO isis quite simple to calculate with the formula: (Average Accounts Receivables * 360 Days)/Credit Sales

 It’s worth noting the reason we multiply by 360 days—as opposed to the year’s actual 365. Choosing 360 allows you to avoid overcomplicating your DSO with fractions. Whether or not your company calcululates with 360 or 365 is up to your discretion.

 To put this calculation into action, Sarah has accounts receivable for $2,000 on February 4th, 2019 and $1,000 on the following month, making her average A/R $1,500. She sold $9,000 worth of credit in total during the financial year of 2018-2019.

 To calculate the A/R aging of her customer’s account, she’ll multiply the average accounts receivable by the fiscal year and divide by the total credit sold to determine that it takes approximately 60 days to receive payment from this customer.

 (1,500 * 360)/9,000 = 60 days

Is Accounts Receivable Aging Required by GAAP?

The Generally Accepted Accounting Principles (GAAP) include procedures that are necessary for estimating, reporting, and eventually writing off bad debts in a company’s financial statements.

Accounts receivable are listed on the balance sheet as an asset, but your company will eventually be required to estimate how much A/R they believe will result in bad debt, and account for it as an allowance for doubtful accounts. The A/R aging is the tool you’ll most likely turn to when estimating how much bad debt your company may incur.

How Can I Improve the Accounts Receivable Aging?

The best way to reduce the aging of A/R is through dunning. Dunning is the process of communicating with clients who have outstanding payments. This communication can take virtually any form: emails, in-app notifications, or a good old-fashioned phone call. The key thing to remember is that honey catches flies. Start by gently reminding a client of their payments due before escalating to more aggressive communication and consequences.

While dunning is the first, and most effective, means of improving your A/R aging, it’s not the only strategy. Check out Maxio’s A/R Management Playbook to learn more ways to reduce A/R aging and increase your cash flow.

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