Editorial · September 6, 2019
Accounts Receivable Aging: How to Read the Report
Accounts receivable aging is a report that sorts the invoices your customers have not paid by how long they have been open. It shows you who owes you money, how much, and how late each bill is. Read it once a month and you can spot slow payers before a small problem turns into a loss.
What the report shows
Accounts receivable are the amounts customers owe you for goods or services you have already delivered. An aging report lists those amounts by customer. Each row is one customer. Each column is a window of time.
The columns are usually 30 days wide. A common layout has a Current column for invoices that are not yet due, then 1 to 30, 31 to 60, 61 to 90, and over 90 days past due. The totals at the bottom show the whole picture at a glance. Most accounting programs can print this report in a few clicks, and a simple spreadsheet can do the same job.
Source: Investopedia, "Accounts Receivable Aging," updated August 28, 2019.
How to read the 30, 60 and 90 day buckets
Start with the totals. Most of your money should sit in Current and the first bucket. If a growing share sits in the 61 to 90 and over 90 columns, customers are paying more slowly than before.
The older an invoice gets, the harder it is to collect. A bill that is 15 days late usually just needs a reminder. A bill that is 75 days late may mean the customer has a cash problem or a dispute with you. A bill over 90 days late is a real risk.
Here is a simple example. Say you are owed $10,000 in all. If $8,000 is current, $1,500 is 1 to 30 days late, and $500 is 31 to 60 days late, you are in good shape. If instead $4,000 is over 90 days late, you have work to do today.
Now look down the rows, not just the totals. One large customer in the 90 day column can matter more than many small ones in the 30 day column. Investopedia notes that a report showing receivables collected much slower than normal is a warning sign. It can mean business is slowing down, or that you are taking on more credit risk when you sell.
Source: Investopedia, "Accounts Receivable Aging," updated August 28, 2019.
How to chase late invoices
Use the report as your to-do list. Work from the oldest buckets first, because those are the most at risk. Then follow a steady routine.
- Remind early. Send a polite note a few days after the due date. Many late bills are simply missed.
- Send the detail. Mail or email a copy of the aging report with the month-end statement, so the customer sees each open item.
- Follow up in writing. For overdue balances, send a collection letter. Keep your tone calm and your facts exact.
- Call the person who pays. Ask what is holding up the bill and when you can expect payment. Write down the answer.
- Change the terms. If a customer keeps paying late, you can ask for cash up front on the next order.
Investopedia says companies use the report to write collection letters to customers with overdue balances. It also says the report can show whether you should keep selling on credit to customers who are always late, or move them to cash only.
Source: Investopedia, "Accounts Receivable Aging," updated August 28, 2019.
Plan for the bills that will not be paid
Some invoices never get paid. The aging report helps you plan for that. In bookkeeping, a business sets aside an allowance for doubtful accounts. That is an estimate of how much of the money owed will not come in.
The usual method uses the buckets. You pick a percentage for each age group. Older groups get higher percentages, because the chance of getting paid falls as time passes. You multiply each bucket by its percentage and add the results. The sum is your estimate of what you may never collect.
For example, you might assume 1 percent of Current invoices, 5 percent of 31 to 60 day invoices, and 30 percent of invoices over 90 days will go unpaid. Those rates are only an illustration. Your own history should set yours.
Source: Investopedia, "Accounts Receivable Aging," updated August 28, 2019.
What the tax rules say about unpaid invoices
The IRS covers this in its Tax Guide for Small Business (Publication 334, 2018 edition). It says goods and services that customers have not paid for are shown in your books as accounts receivable. If you cannot collect part of them, that part is a business bad debt.
The method of accounting you use matters. With the accrual method, you report income when you earn it. You can take a bad debt deduction for an uncollectible receivable if you already counted that amount as income. With the cash method, you report income when you are paid. You cannot deduct money you never received and never counted as income.
Tax rules are specific, so talk with a tax professional about your own case. A clean aging report gives that person the dates and amounts they need.
Source: Internal Revenue Service, Publication 334 (2018), Tax Guide for Small Business, "Bad Debts."
A simple monthly habit
Pick one day each month. Print the report. Check the totals, then the oldest rows. Call, write, or change terms where needed. Compare this month with last month. If the old buckets are shrinking, your system works.
Sources
- Investopedia, "Accounts Receivable Aging," updated August 28, 2019.
- Internal Revenue Service, Publication 334 (2018), Tax Guide for Small Business.