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How can aging of accounts receivable help your business?

Aging in accounting refers to accounts receivable. Essentially, it’s all about the amount of time that has elapsed after the due date. Aging accounts receivable reports can be immensely beneficial for your business, providing you with greater insight into the financial reliability of your clients and whether your company is lagging when it comes to collections. Find out a little more information about aging reports with our comprehensive guide.

What is an aging report for accounts receivable?

Put simply, aging reports are tools that show how much money you’re owed at a specific point in time by a client. An aging accounts receivable report should show you the following pieces of information:

  • How much the client owes you

  • How long the client has owed you

  • Which client owes the most to your company

Generally speaking, aging reports are broken down into different sections determined by aging periods, i.e., current, 1-30 days, 31-60 days, 61-90 days, 91+ days. Ultimately, you can use this information to work out the amount of bad debt held by your business and take steps to collect it or write it off.

Understanding how the aging of accounts receivable works

Now that you know a little more about aging in accounting, let’s explore how to produce an aging report. It’s relatively simple, as you can just use your business’s accounting software to create the report. Make sure that you sort your accounts receivable according to the due dates on the unpaid invoices, as this should help you determine which clients have owed you for the longest period.

Why is aging in accounting important?

The short-term benefits of the aging of accounts receivable are plain to see. Aging reports help businesses understand which receivables need to be dealt with first. The longer that you allow an invoice to go unpaid, the lower your chances of securing payment. As such, it’s always a good idea to have a solid grasp of your company’s aging accounts receivable report. There are also long-term benefits. Aging in accounting can give you a deeper insight into the following areas of your business:

  • Credit risk – Firstly, aging accounts receivable reports can be used to determine which of your clients pose the most significant credit risk, and therefore, shouldn’t be extended credit in the future. You can also compare your firm’s aging report for accounts receivable to industry standards to work out whether you’re taking on too much risk.

  • Collection practices – If you have a large number of older receivables on your aging report for accounts receivable, it may indicate that your business has poor collection practices. Maximising efficiency in your billing process and using a Direct Debit payment solution, such as GoCardless, can improve your debt collection function and boost your company’s cash flow.

  • Bad debt allowance – Finally, it’s important to remember that your aging reports are likely to play a significant role in your company’s bad debt allowance, also referred to as the provision for doubtful debts. In short, this refers to the fact that you won’t be able to collect some of your debts, which means that they’ll need to be written off.

In short, aging reports provide you with a better handle on your invoicing and collections process, making it easier to handle cash flow, plan future expenses, and produce credit policies.

What about accounts payable aging?

Aging reports for accounts payable are exactly the same as aging accounts receivable reports, except it covers invoices that you owe to suppliers. Utilising aging reports for accounts payable can ensure that you pay your invoices on time, while also taking advantage of any early payment discounts that may be available.

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