Guide to Accounts Receivable Aging: Definition, Calculation, Benefits, & More

What is accounts receivable aging and why is it important? 

Simply put, A/R aging describes monitoring your unpaid or other receivables by categorizing them according to how much time has passed since the initial invoice was sent. By keeping track of this period — and its decrease or increase over time — your finance and management teams can more easily improve your accounts receivable while also gaining insight into the health of your overall cash flow and that of your customers.

How does accounts receivable aging work? 

You’ll predominately manage and track your A/R aging with an aptly named accounts receivable aging report. These documents typically arrange outstanding invoices in 30-day increments, though businesses with atypical billing cycles or credit options might adjust the time frame accordingly. The reports are commonly run weekly or monthly and look something like this: 

The “Current” column lists charges that haven’t yet been invoiced. The following three columns reflect the amounts owed for bills sent in the past 30, 60, and 90 days. And those invoices that are over 90 days will likely either be sent out for collections or flagged as bad debt in the near future. Typically, a company’s accounts receivable are tracked in a single row, but the example above reflects a more detailed option that breaks up and tracks outstanding A/R by specific invoice.

As you can see, aging reports will commonly include:

• Customer information: These records should feature the company’s name at minimum, but you should also highlight other relevant facts, such as the corresponding account number or contact details.
• Aging categories: These buckets identify how long a given charge has been outstanding, and as previously mentioned, they are typically broken into 30-day increments.
• Invoice details: Depending on the granularity of the record, you may wish to break out each owed amount by invoice rather than tracking it at a per-customer level.
• Amount owed: You’ll want to identify the outstanding amount for each aging category and each account or invoice.
• Additional details: Billing doesn’t always run smoothly, so you’ll also want to document any credit memos, invoicing irregularities, or other factors that might affect the payment process.

How to create and use accounts receivable aging reports

The ideal strategy for generating these reports is to leverage some form of A/R software that can automatically create them by pulling relevant invoice and payment details directly from your broader enterprise resource planning (ERP) systems. However, it is also possible to produce them manually using a spreadsheet. Here’s how to create an aging report manually: 

Creating the report

1. Gather all outstanding invoices: Ensure you have effective systems to quickly match incoming payments with the correct client account and invoice.
2. Organize these records: Separate invoices by customer, by invoice, and by your established aging categories, then add this information to the report spreadsheet.
3. Run the numbers: Use a calculator or spreadsheet function to sum up the amounts.
4. Set up a regular cadence: An isolated report provides limited insight, so set up a regular schedule for generating these documents.

Analyzing and using the report

Once you have an aging report, the next step is to analyze it to gain valuable insights. A single report provides a snapshot of your business’s current health, helping you identify which invoices are at risk of becoming bad debt. This allows you to focus your collection efforts on accounts with high volumes or values of outstanding invoices.

However, the true value of aging reports emerges when analyzed over time. Reviewing a series of reports helps detect historical patterns and emerging trends, making them crucial for comprehensive accounts receivable analysis. These documents provide consistent, real-world data to benchmark your overall performance.

With ongoing monitoring, you can more easily:

• Flag problem accounts: Identify accounts that consistently make late payments. This will help you decide when to revisit credit terms or offer early payment incentives.
• Notice quality issues: Detect recurring disputes related to specific products or services, which may indicate underlying delivery or billing problems.
• Evaluate adjustments: Assess the impact of credit term changes, process improvements, or A/R best practices on your operations.
• Gauge overall health: Understand the financial health of your customer base, industry trends, and the broader economy.

How to calculate accounts receivable aging 

For example, consider a business that produces high-quality laser tag harnesses, exclusively selling to professional teams on the Tag, You’re It circuit. In the past few months, the company has fulfilled orders for Alpha Co., Bravo Co., and Charlie Co. — three prominent teams in the league. As part of your accounts receivable management efforts, you routinely create aging reports at the end of each month.

Here’s how you would calculate the aging report for these customers: 

Alpha Co.: You completed a delivery three days ago but haven’t invoiced it yet. The previous shipment, invoiced 47 days ago, totaled $4,270. The aging report would categorize this amount as follows:

• Current: $4,270 (not yet invoiced but considered for future periods)
• 30 Days: $4,270 (since it’s been 47 days since invoicing, it falls into this category)
• Subtotal: $8,540

Bravo Co.: Bravo Co. purchased $1,800, with the invoice sent 17 days ago:

• Current: $1,800 (invoice is less than 30 days old)
• 30 Days: $0
• Subtotal: $1,800

Charlie Co.: Charlie Co. has made regular purchases, with recent totals of $1,245, $500, and $1,700. These purchases would be categorized as follows:

• Current: $1,245 (most recent invoice, less than 30 days old)
• 30 Days: $500 (invoice is 30 days old)
• 60 Days: $0
• 90 Days: $1,700 (invoice is between 60 and 90 days old)
• Subtotal: $3,445

Here’s a simplified A/R aging report for these three customers:

Benefits of accounts receivable aging reports

Boost A/R performance

With consistent processes and ongoing reporting, you can quickly determine the effectiveness of your dunning efforts. For instance, if your average A/R 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 employing a multi-channel communication strategy that simultaneously uses several contact methods (e.g., phone, email, text).

Of course, to fully leverage your performance monitoring efforts, you’ll want to supplement your aging reports with similar records that document common accounts receivable key performance indicators (KPIs). In particular, you’d be wise to capture your days sales outstanding (DSO), which identifies the average time your business takes to collect on a given invoice. Similarly, your accounts receivable turnover (ART) ratio identifies how often your business collected its average A/R in a given time frame.

Predict cash flows

As you gain a clearer picture of your A/R aging, you also gain insight into your cash flow. This clarity helps you make better-informed decisions for future budgeting or growth strategies based on historical data regarding the immediate and longer-term funds available.

Avoid unnecessary risk

If you continue delivering goods or services to a customer who hasn’t paid for several months, that business may have a larger issue. Persistent outstanding A/R can signal that a company is experiencing significant financial difficulties or is at risk of failing. Extending more credit in these situations rarely pays off.

Proactive conversations with such customers can help you explore reasonable payment alternatives or other mutually beneficial solutions, reducing potential crises that could damage your relationship.

Keep accurate records

No one wants to face an audit, but being prepared is important. Maintaining a clear, accurate, and up-to-date view of your A/R aging and collections efforts positions you to validate better past asset values and revenue claims and current ones.

Invoiced: Streamline your cash flow with automated accounts receivable software

As mentioned, creating your accounts receivable aging reports by hand is time-consuming and labor-intensive. However, this process is critical for building a sound invoicing and payments strategy, so there’s no room for mistakes. 

The most efficient and accurate way to manage A/R aging is through Accounts Receivable Automation software. This technology automatically pulls relevant payment and invoicing data from your back-office systems, minimizing the risk of transcription errors. With Invoiced, our A/R software offers built-in, customizable reporting dashboards that simplify creating and managing your A/R aging reports.

To make better use of your time — moving away from manual spreadsheet assembly, invoicing, and follow-up communications — schedule a demo of our software today.