Account Receivable Ageing Report: What Does It Do And Why Should You Run One?

Receivables are classified as a business asset because they have a monetary value. They represent the total amount owed to your business. They are at the top of the list of assets because they can be turned into currency. They become cash as soon as they are billed.

Any cash businesses or businesses that depend heavily on credit card customers do not have any receivables. However, if you bill your customers and give them terms such as paying for a certain period, you’ll want to be able to run an A/R ageing report to see how much is owed to each of them.

Let’s check how necessary an accounts receivables report if you want to keep your company stable in the financial world.

What Is Account Receivable?

Accounts receivable is a management method used by accountants to review a company’s receivables and detect any existing discrepancies. The ageing approach categorises receivables based on how long an invoice has been past due to decide which consumers to submit to collections and who to aim for follow-up invoices. Accounts receivables, also known as “receivables” or “A/R,” are the sums owed to a business by its customers. It can be compared to payments due (financial statements) to your company or business.

Accounts Receivable Ageing Report

Accounts receivable ageing, also known as accounts receivable reconciliation, is the method of categorising all of the customers’ due sums, including the time the amounts have been outstanding and unpaid. The aged study is used for debt collection and credit establishment.

This form of accounts receivables report usually falls into the following categories:

Right now:

Due within the next 1 to 30 days

From 31 to 60 days:

A month late: 61 to 90 days

Overdue for two months, 91 days or more

If a consumer has several bills that were accrued at various times, the report will indicate how much is owed and when it is due.

Look for the largest sums of money owed by all consumers first. Are these figures up to date? Is it for 30 days? Or have these bills been unpaid for at least 120 days? Consider the 80/20 principle (also known as the Pareto Principle), which states that approximately 80% of problems are created by 20% of your clients.

If you concentrate on the top 20% of clients, those with the highest balances, you can maximise your collections. This will give you the best return. Determine how you can treat each of these big bills, then write it down and have your accounts receivable manager get to work.

What Is the Ageing Timetable?

The ageing schedule is a table that depicts the relationship between a company’s outstanding invoices and bills and their respective due dates. The term “ageing schedule” refers to how accounts receivable are classified based on their age. It shows the cumulative amount of accounts receivable that has been pending for a given period.

Accounts receivables that are less than 30 days old, less than 45 days old or more/less than 90 days old are listed on the ageing calendar. This is used to determine which of its clients pay on time and can also be used to estimate cash flow.

What Is the Purpose of Ageing Schedules?

Changing Credit Card Policies

The ageing schedule is used to classify clients who have not paid their invoices on time. If the majority of the overdue sum is attributed to a particular customer, the company may take the appropriate measures to ensure that the customer’s account is collected as soon as possible.

If many customers have overdue amounts that exceed 60 days, it can indicate that the credit policy for current and new clients needs to be tightened.

Diagnosing Cash Flow Problems

The ageing schedule often detects any recent changes and issues with accounts receivable. This will provide the answers you need to protect the company from cash flow issues.

Determining The Allowance For Doubtful Debts

The accounts receivable ageing approach is used to measure the sum of uncollectible debts, which provides an estimate of the receivables that might not be obtained. This serves as the final balance of allowance for questionable accounts.

Although the percentage varies by category and is determined by historical experience and current economic circumstances, the general rule of thumb is that the longer an account receivable is pending, the less likely it is to be collected.

At the end of each accounting period, a changing entry in the general journal should be made to report bad debts cost. Make a modifying entry by debiting the bad debts expense account and crediting the deduction for questionable accounts after calculating the cumulative amount of expected uncollectible.

Why Is an Account Receivable Ageing Report Necessary?

Here are some advantages of using accounts receivables reports that are aged:

Contact clients regularly and let them know you’re on top of your billing and collection efforts.

Examine your payment terms with your suppliers and make any required adjustments.

Break relations with clients who consistently fail to pay their invoices on time, which can lead to cash flow issues for the company.

Stop delivering goods or services until late payment becomes a problem and you are forced to write off bad debts.

If you plan to factor in your unpaid invoices as a funding method, an accounts receivable ageing report would be one of the documents required by your factoring business.

It is used to assist in determining the factoring rate.

Final Thoughts

It can be difficult to maintain a healthy cash flow and recognise potentially bad credit risks to your company without accounts receivable ageing study. Make sure to include the customer details, status of collection, total amount outstanding, and financial history of each client when creating the accounts receivable ageing report.

Accounting software that allows you to configure client settings, such as sending automated payment notifications for particular customers, defining the intervals between reminders, and including a customised note, makes the job simpler.