Opportunity is passing you by. An unprecedented gap just opened in your market – one that your business is uniquely designed to fill – but you don’t have the cash in hand to capitalize on it. And what’s most frustrating is that right now – you have several existing customers that owe your company money. But all of that cash is out in the financial ether.
Unfortunately, your accounts receivable (AR) processes and reporting could use some improvement, so you’re not entirely sure what all you’re owed or how long it’s been owed. All you do know is that if you had pursued some of those delinquent accounts more effectively, you wouldn’t be scrambling to collect right now.
AR Aging: Know What You’re Owed
Put simply, AR aging is a list of unpaid invoices or other receivables categorized by date range. By monitoring the length of time an invoice was issued and categorizing your outstanding debts according to age, your finance and management teams have insight into the health of your cash flow and that of your customers as well.
Effective AR aging helps you identify payment trends, determine appropriate overdue invoice follow-up strategies, and identify potential funding or payment issues before they have a chance to escalate. And this insight is gleaned from monthly AR aging reports.
What is an AR Aging Report?
Commonly, AR aging reports arrange and track outstanding company debts in 30-day increments (but businesses with atypical billing cycles or credit options might adjust the tracking time frame accordingly). The reports are typically run once each month and will look something like this:
| Company | Current | 30 days | 60 days | 90 days | Over 90 | Total: |
| Company A | $4,270 |
| $4,270 |
|
| $8,540 |
| Company B |
| $1,800 |
|
|
| $1,800 |
| Company C | $1,245 | $500 |
| $1,700 |
| $3,445 |
| Company D | $1,950 | $2,480 |
| $5,630 | $2,040 | $12,100 |
| Total: | $7,465 | $4,780 | $4,270 | $7,330 | $2,040 | $25,885 |
The “Current” column shows charges incurred by customers who haven’t yet been invoiced. The following columns, in turn, reflect the total outstanding AR past 30, 60, and 90 days. Typically, a company’s entire accounts receivable is tracked in a single row, but more detailed reports might include additional rows that break up and track these AR by specific invoice.
How Do These Reports Help?
The ultimate goal of tracking AR aging is to shorten the payment cycle. Beyond clearly recording how much your business is owed and by whom, these reports can help you:
Establish consistency
By accurately determining where each of your customers is in the payment cycle, you can build out and test repeatable follow-up processes. Businesses don’t routinely show concern regarding outstanding AR of less than 30 days, at most giving the customer a friendly nudge as the 30-day mark approaches. However, as these unpaid invoices reach 45-, 60-, or 90-days, you can create consistent, automated touchpoints across email, phone, mail, SMS, and more to encourage customers to settle their accounts.
Track AR performance
With consistent processes and ongoing reporting, you can quickly determine the effectiveness of your follow-up efforts. For instance, if your AR aging is less than 60 days, no problem. But if most invoices are paid after 90 days, you likely need to make some adjustments. Consider sending reminder notices earlier in the cycle or multi-channel outreach via several methods simultaneously (e.g., phone, email, text).
Predict cashflows
As your AR aging picture becomes more clear, so does your cash flow. And as your business budgets for the future or considers improvements for growth, you can make better-informed decisions based on historical, real-world data regarding what funds you’ll have available in the immediate and longer-term future.
Prevent unnecessary risk
If you’re still doing work for a customer that hasn’t paid for several months, there’s likely a problem with the customer. Persistent outstanding AR can indicate that a business is experiencing a major slowdown or might even be at risk of failing. And extending more credit in these situations rarely pays off.
Keep accurate records
No one wants to be audited, but bad things happen to good companies. Ensuring that you have a clear, accurate, and current view of your AR aging and collections efforts means that you’ll be able to more easily validate past asset value and revenue claims and back up current ones.
Mistakes to Avoid
Of course, to capture the full value of AR aging reports, you’ll also need to avoid some common pitfalls.
Forgetting history
For example, you might notice that one of your smaller, long-term customers have some outstanding invoices that have hit the 90-day mark — the timeframe when you typically send accounts to collections. But if you never review their payment history, you might not notice that this isn’t the first time that this has happened and that they always do catch up. Rather than risking the relationship with a collections notice, you might discuss alternate credit arrangements.
Ignoring patterns
Don’t miss the forest for the trees. As time progresses and more AR aging reports are gathered, your business will be in a key position to identify payment trends among your customer base. Does a particular customer segment seem to be struggling? You may want to shift your sales strategy or credit policies accordingly.
Keep It Simple: AR Aging Report Automation
Old debt is bad debt. So the faster your business can collect AR, the better for your bottom line. By choosing to automate your AR processes – including the creation of AR aging reports – with the right software, you can cut out much of the time and errors common to manual, human-driven processes. So instead of spending hours assembling spreadsheets, generating invoices, and manually developing and sending follow-up communications, you can focus on more strategic efforts.
Move Forward with Invoiced
If you’re interested in introducing AR aging reports to your business or looking to streamline your current efforts, consider scheduling a demo of our AR automation software. Automated collections and multi-channel reminders, driven by our Smart Chasing Engine, can help keep your decision-makers better informed while offloading monotonous collections work from your staff.
