Accounts Receivable Aging Defined

After a business completes a sale, delivers the goods and/or services, and invoices the customer, all that’s left to do is wait to get paid. The clock ticks and the calendar turns. If the due date passes without the customer paying their bill, serious problems can arise. Unlike a fine wine, the quality of a receivable declines — significantly — as it ages. Eventually, if payment isn’t received, the company’s accountants must write off the receivable as uncollectible, which hurts cash flow and earnings. But it doesn’t have to be this way.

Accounts receivable (AR) aging helps business leaders monitor the status of open customer receivables and alerts accounting staff to follow up with the customer, increasing the likelihood of collecting payment. AR aging reports have been around for decades, but accounts receivable software that automates certain AR processes improves the timeliness and accuracy of aging reports, making them even more crucial tools for increasing collections and managing cash flow.

What Is Accounts Receivable Aging?

AR aging is a way of categorizing unpaid customer receivables according to the length of time the debt is past due. A typical aging report groups receivables into buckets based on the elapsed time since the invoice was due, such as current, 1-30 days, 31-60 days, 61-90 days and over 90 days. Aging is primarily used to help gauge the quality of a company’s receivables. It’s generally accepted that the longer an invoice remains open, or unpaid, the less likely it is that the customer will remit payment. As a result, it’s important to keep a close watch on how long individual invoices remain unpaid so the business can quickly intervene, improving the chance of collecting payment. Beyond collection efforts, AR aging also informs cash flow forecasts, credit approval policies, sales efforts and estimation of accounting reserves required for bad debt.

Key Takeaways

• AR aging categorizes open customer receivables based on the length of time that the invoice is past due.
• AR aging reports are essential tools to minimize write offs for bad debt, since collecting payment on a past-due receivable becomes less likely as an invoice ages.
• Aging analysis also provides insights that influence sales outreach, credit policies and collections efforts, as well as cash management.
• When used in conjunction with automated accounts receivable software, AR aging can help a business improve earnings and cash flow.

Accounts Receivable Aging Explained

An AR aging report tallies the number of days that have passed since the due date on unpaid customer invoices. It typically shows aggregate totals for each aging bucket a company uses (most often in 30-day increments for the first three months, plus anything over 90 days), and gives detailed information for each overdue customer invoice. The visibility of both customer- and invoice-level details makes aging a different tool from metrics like days sales outstanding (DSO) or AR turnover. DSO and AR turnover are both blended measures of the average time it takes to collect AR vis-à-vis the overall activity for a period. They are directionally helpful, but AR aging is more of a bottom-up approach to analyzing AR, providing a better basis for specific action. For example, AR automation can use the age of an invoice to trigger, generate and send payment reminders to customers, a huge time saver compared with similar manual approaches.

How AR Aging Works

AR aging is based on the payment terms specified in a customer invoice and the date the aging report is prepared. The age of an invoice is calculated as the elapsed time between its due date and the report date. When calculating aging, open customer invoices (aka receivables) are grouped into buckets based on when payment is due. An open receivable is considered “current” until its due date. For example, an invoice dated July 25 that is due in 30 days, (i.e., August 24) is considered “current” in an aging report prepared on August 1. Beginning on day 31 — in this example, August 25 — the invoice is past due. If a second aging were run on September 1, the same invoice would be aged 7 days and appear in the 1-30 days bucket. If the invoice were to remain open, it would be 37 days past due on a third aging prepared on October 1.

Keep in mind that the aging buckets are based on days overdue, most often in 30-day intervals, such as 1-30 days, 31-60 days, 61-90 days and over 90 days. Our example invoice shifts buckets as it ages. It would be included as current on the first aging, in the 1-30 bucket on the second aging, and in the 31-60 bucket on the third.

Accounts Receivable Aging Schedule

An AR aging schedule is a columnar report that shows the aging status of all open accounts receivable, usually as individual customer invoices. The order of the columns is pretty standard, with the first three columns including identifying information such as invoice number, invoice date and customer name/number. The next set of columns shows the aging buckets, or intervals. Since invoices are typically grouped in 30-day intervals, the next five columns could be “current,” “less than 30 days,” “31-60 days,” “61-90 days” and “over 90 days.” The final column is usually the total value of outstanding receivables. Depending on how it is structured, an aging report may provide only summary-level subtotals for each bucket or include more detail, such as the total receivables due from each customer and for each bucket.

How Aging Schedules Are Used

AR aging schedules are used primarily to monitor unpaid invoices. They provide an easy way to identify customers with past due balances, and they highlight the length of time each invoice is overdue. As a result, AR aging is a highly useful schedule that comes standard with most AR software.

More specifically, AR aging can be used to:

• Determine effectiveness of collections.

  The goal of any AR department is to collect cash as quickly as possible, especially when a customer’s account is past due. The collection process includes a variety of customer outreach efforts at several checkpoints, such as payment reminders as a due date approaches and dunning notices after it has passed. Sometimes, discount offers for early payment are sent to help get invoices paid more quickly. Such outreach can take many forms, including emails and telephone calls. In the worst case, unpaid AR may eventually require escalation to a third-party collection agency. AR aging reports provide the data to analyze how effective the collection process is in light of the dollar-value of invoices that fall into the different aging buckets.

• Indicate customer credit risk to company.

  Slow-paying customers put a strain on a business’s cash flow. Further, an accumulation of aging receivables from a particular customer may indicate that revenue will never be collected. Thus, AR aging highlights slow-paying customers who present a credit risk, providing a warning for the collections and sales teams, as well as for senior management. By reviewing the aging profile of a customer’s payment activity, senior managers might decide not to engage in future business with that customer.

• Estimate potential bad debts.

  It’s a common practice for accountants to use the data from an AR aging schedule to estimate the amount of potentially uncollectible AR, which they record as a bad debt expense. This process multiplies the dollar value in each of the aging buckets by a certain percentage to calculate an estimated total value of the company’s bad debt. Though a company would determine the appropriate multipliers to use by drawing from its own past experience, the percentages are usually progressive, meaning that the older the aging bucket, the higher the multiple used to estimate the bad debt. This practice is typically the first step in estimating the value of AR that may never be collected for accounting purposes, although collection efforts are likely to continue.

• Spot cash flow issues.

  Collecting customer receivables is a primary source of cash for most businesses. So, proactively managing receivables balances using AR aging can go a long way toward helping a company solve cash flow problems. Mounting AR balances mean that cash isn’t coming in. Monitoring DSO and keeping it as short as possible is a best practice to improve cash flow. An AR aging schedule can function as an early warning of changes in DSO, highlighting the point where balances in the longer aging buckets start to differ from past norms. In addition to spotting cash flow issues, analyzing the balances in the various aging buckets can help predict when cash might be coming in, especially when combined with qualitative information from the collections team.

• Alter credit policies.

  AR is created when customers buy on credit provided by the business. Ideally, customers pay their invoices within the payment terms. One of the many reasons an account becomes overdue is that the business extended more credit than the customer can handle. Large customer balances that are continually overdue may indicate that credit policies need to be tightened. Additionally, if the majority of customers are continually overdue, then it may be worthwhile to consider adjusting billing terms. AR aging is a helpful tool for analyzing these situations because it shows customer-level detail as well as aggregated balances.

Importance of AR Aging Reports

Uncollected AR means lost revenue, cash and profit — an undesirable trifecta. That’s why AR aging is one of the most important business accounting reports, since it provides insights into the internal and external issues related to receivables that can help you improve cash collection. AR aging spots issues with customers who may be running up overdue balances, but also shows those who consistently pay on time. This kind of information helps support sales strategies and customer relations that address both types of customers.

Internally, AR aging analysis can uncover potential personnel issues. For example, an aging-by-salesperson report could reveal clusters of dissatisfied and slow-paying customers tied to one or two salespeople, suggesting an underlying issue with their sales tactics. In addition, AR aging can highlight the productivity of collection staff. Analyzing AR aging can expose challenges lurking in areas like customer credit review or invoicing. And at the core, of course, aging reports are essential for maximizing the amount of customer receivables collected by revealing the status of overdue accounts so the AR team can intervene appropriately.

The Structure of an AR Aging Report

Since a picture is sometimes worth a thousand words, the following images depict typical aging reports for a fictional company, Acme Industries, whose payment terms are net 30 days. The information is the same in all three images, but the structure is different, with one providing full details for all customers, another showing summary information by individual customer and the third formatted according to invoice. In all cases, the images shown are just excerpts — typical aging reports are many pages long, which is one reason why preparing aging reports manually is such an arduous task. Today, most AR software can generate automated aging reports, and more advanced software enables customization for situations where billing terms and aging buckets deviate from the standard 30 days. If your business operates on net 15-, 45- or 60-day billing terms, for example, the aging report should reflect that.

Benefits of AR Aging

AR aging reports have been used for decades, precisely because they have many benefits. Automation makes them even more helpful and timely. The benefits of AR aging include:

• Triggering collection efforts.

  Different types of collection efforts are appropriate at different stages of a receivable. The aging report can easily differentiate customer invoices according to relative delinquency so that a business can pursue the right measure at the right time. For example, current accounts may need a reminder email, but accounts aged over 90 days warrant more rigorous collection tactics.

• Improving cash flow.

  AR aging helps improve cash flow by increasing the likelihood of collecting receivables. It also can identify overdue accounts that might be saved from default by means of adjusting payment schedules or offering some other intervention. AR aging also assists with cash flow forecasting and analyzing DSO trends.

• Helping estimate bad debt expense.

  A common way for accountants to estimate bad debt expense is by assessing the values in each of the aging buckets and multiplying it by a factor based on the company’s historical experience collecting receivables at those ages. Since bad debt expense reduces profitability, it’s important that such projections be as accurate as possible.

• Improving the credit review and approval process.

  Aging history can be helpful when evaluating how much trade credit to extend to customers. This is most useful before a sale is made, but it can also reduce the risk involved in continuing to accumulate balances from customers who are already past due on prior sales.

Improve Collections With NetSuite

Replacing manual accounts receivable processes with an accounting solution that automates the entire invoice-to-cash cycle can help businesses of all sizes significantly increase collections by making it easier to keep track of AR aging. NetSuite Accounts Receivable software includes flexible reporting tools that allow AR aging to be displayed in multiple ways, such as by customer, salesperson or subsidiary, as well as by date range. Role-based dashboards give accounting staff access to real-time AR Aging data at a glance, while automated alerts keep them focused on high priority accounts. NetSuite Dunning Letters also helps improve collections by sending customers reminders before payments are due and automatically emailing delinquent accounts at specified intervals. With this combination of features, companies can reduce DSO, improve cash flow and minimize the need to write off unpaid receivables.

AR aging is a way of organizing outstanding receivables based on invoice due dates. Keeping track of AR aging is important because the longer a customer invoice is past due, the less likely it is to be collected, which hurts cash flow and affects earnings. By carefully monitoring AR aging, companies can improve collections and reduce financial risk. And while AR aging reports aren't a new concept, automation makes them faster and easier to prepare, resulting in timelier data that is more useful to AR staff.

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Accounts Receivable Aging FAQs

How do you create an accounts receivable aging report?

AR aging reports calculate how many days have passed since the due date on a customer invoice. Different types of AR aging reports might show detailed information at the customer or invoice level, as well as aggregate totals for each aging “bucket.” The order of the columns is usually pretty standard, with the first three columns being invoice number, invoice date and customer name/number. The next set of columns are the aging buckets, or intervals. Typical buckets are based on 30-day intervals, so the next five columns could be current, under 30 days, 31-60 days, 61-90 days and over 90 days. The final column is usually a total amount outstanding. There can also be subtotals for each customer and for each bucket.

What is a good AR aging percentage?

The percentage of AR that falls into each aging bucket varies based on a company’s billing terms and when the aging report is run. Most companies aim to have the lowest percentage of significantly past due receivables as possible, as shown in the over-90-day bucket. What constitutes a good percentage for that over-90-day bucket varies significantly by industry. For example, general contractors in the construction industry had 31% of their receivables aged over 90 days, compared to 13% for retail furniture and 1% for travel agents, according to Dun & Bradstreet’s report for the first quarter of 2022.

How do you calculate accounts receivable aging?

Until the due date arrives, an open AR is considered current. For example, an invoice dated July 20 that is due in 30 days, (August 19) would be considered “current” on an aging report prepared on August 1. Beginning on day 31, (August 20) the invoice is considered past due. If another aging were run on September 1, the same invoice would be past due, or aged 12 days. The same invoice would be 42 days past due if another aging is prepared on October 1.

Why is accounts receivable aging report important?

AR aging is one of the most important business accounting reports, since it provides insights into the internal and external issues related to receivables that can help improve cash collection. AR aging helps identify customers with significant overdue balances allowing AR staff to prioritize collections efforts.

Internally, AR aging analysis can also uncover potential issues with process like customer credit review and approval. At their core, of course, aging reports are essential for maximizing the amount of customer receivables collected by revealing the status of overdue accounts so the AR team can intervene appropriately.

What is an accounts receivable aging schedule?

An AR aging schedule is a columnar report that shows the aging status of all open accounts receivable, usually as individual customer invoices. They provide an easy way to identify customers with past due balances, and they highlight the length of time each invoice is overdue. As a result, AR aging is a highly useful schedule that comes standard with most AR software.