Are you amassing unpaid invoices? Are you wondering which ones are most at risk and should be addressed first? Whether you are a small business owner or a corporate controller, you understand how vital it is to keep a close eye on your outstanding payments.
Occasionally, you will need to make a concession and take a phased strategy to collect your consumers’ balance. However, this does not mean you waive all pending payments. This is why it is vital to conduct periodic reviews of your aging report and to take appropriate action as necessary.
What is an Aging Report?
An accounts receivable (AR) aging report indicates an invoice’s length of time past due.
All unpaid invoices, along with detailed client information, will be shown in aging reports, providing you with a comprehensive view of your receivables and cash flow.
An aging report includes information about a customer’s receivables, the actual amount owed, and the period.
How To Use The Aging Accounts Receivable Report
Apart from alerting you to past-due payments, an accounting receivable aging report can be beneficial in various ways. Here are some strategies to make effective use of aging reports:
Calculate the Risk of Bad Debts
Certain invoices have been over their due date for an extended period, and you will be unable to collect them. There are numerous additional reasons why a payment may be ruled uncollectible, such as the payers’ inability to repay or other circumstances. These unpaid invoices are referred to as bad debt and indicate the amount of damage you may incur.
Each accounting period, you must keep track of these bad debts and estimate their cost to your business. And you can accomplish it by utilizing an aging report to obtain the necessary data.
Additionally, you can estimate bad debts to adjust your policies, allowing for forbearance concerning doubtful customer accounts. For instance, you might evaluate historical client interactions, past due payments, and the amount of bad debt they contributed to determining whether you need to revise your allowances.
Generally, the longer your debts remain uncollected, the greater the likelihood that they will remain uncollected in perpetuity. A frequent assessment of your aging reports, aided by accounting software, will provide you with the direction necessary to maintain control of bad debts.
Recognize Cash Flow Issues
To maintain a solid financial position for your business, you must ensure that your customers pay you and pay on time. According to Jessie Hagen of US Bank, 82 percent fail due to poor cash flow management. Consider the following scenario: you receive a large order from a customer who does not pay in advance. As a result, you borrow money from investors or banks to obtain supplies and complete product delivery.
Suppose the consumer does not pay you back on time. In that case, you will incur accruing interest, which will negate any profits you may earn regardless of whether the customer eventually pays you. You must determine when you can afford to wait for payment without incurring a loss. An aging report assists you in identifying such instances and keeping a constant awareness of your business’s cash flow.
Enhance Your Collection Techniques
Occasionally, you will not be paid on time because your customer’s pay cycle differs from the one offered by your organization. In these scenarios, all you need to do is realign your service delivery or invoice warning method to correspond to their pay cycle, reducing the likelihood of late payments. An aging report enables you to study and evaluate such events and your collection operations.
If you have several accounts that are older than 60 to 90 days, this indicates that your present collection technique may be ineffective.
You can increase your A/R collection by implementing new strategies such as prioritizing collection efforts, sending reminders when the initial payment is late, and growing in-person conversations.
Evaluate Your Credit Policy
An aging report is an efficient approach to assess the performance of your credit policy swiftly. For example, if the majority of your outstanding payments come from a single client, it’s rather evident that there is a problem with this consumer. In that situation, you must determine why they are delaying payments and may need to apply more aggressive collection techniques with that consumer.
However, if you have several clients late on payments, this may indicate an underlying issue with your credit policy. You can keep track of such instances and determine whether your credit risk is equivalent to industry standards.