Why an AR aging report is important
Accounts receivables (AR) aging reports help businesses track their outstanding payments from customers. Companies want to sell products and services, and receive timely payments. Hence, they must always keep track of their finances and stay on top of who owes them to maintain their financial health.
1. Stay on top of your billings
AR aging reports show you customers who repeatedly fail to pay their invoices. You can then contact them to follow up on the invoice, allowing you to stay ahead of your billing and collection processes. Regular follow-up prevents late payments and reduces bad debt occurrences.
2. Sever ties with your clients
Aging reports show you which clients to sever ties with to prevent losses. For example, you can let go of clients who continually fail or struggle to pay their invoices.
3. Maintain healthy cash flow
Late payments are problematic for several reasons, including disrupting a company's cash flow. A healthy cash flow through your business is essential in running a successful enterprise. Companies can fail when customers stop paying. However, a lot more businesses fail because of mismanaged cash flows.
An aging report allows you to identify problems and issues in accounts receivable. You can then take steps to remedy those problems, such as getting clients to pay invoices faster or preventing cash flow issues.
4. Identify bad credit risks
The AR aging report method can help you estimate your uncollectible debts, including the approximate amount of receivables you may not collect for one reason or another. You can then use this as the end balance of allowance for your doubtful accounts.
Often, the longer accounts receivables remain outstanding, the less likely you will collect them. You're left with adjusted general journal entries for bad debt expense, which you can later use to identify bad credit risks early and avoid them.
5. Alter your credit policies
AR aging reports help identify customers behind on payments. As you go through the report, you may notice one or two clients responsible for most of your late payments and proceed with the necessary measures. However, if you note multiple clients with repeated late payments, it indicates a credit policy issue.
In such cases, you should compare your credit risk and policy to industry standards to see if you take too much risk or need to make adjustments.
6. Improve your collection process
AR aging reports allow you to analyze your collection process. For example, numerous old accounts receivable, mostly clocking over 60 or 90 days, indicate you may have a weak collection process. Thus, if you notice this trend from your reports, you can remedy the situation by adjusting your collection practices, sending invoices correctly, or hiring a debt collection agency.