Did you know that over 50% of small businesses experience late payments, causing cash flow crunches that can cripple operations?
One of the most powerful tools to ensure your business stays financially stable is the aging report—a simple yet effective way to track overdue payments and manage receivables.
This guide will walk you through the essentials of an aging report, why it’s crucial for safeguarding your financial health, and how you can create one.
Plus, we’ll explore real-world examples of how businesses have used aging reports to unlock trapped cash and reduce outstanding debts.
An aging report, also known as an accounts receivable aging report, which will summarize all customer invoices that have not been paid yet according to the date they became due.
It also further classifies the outstanding receivables into intervals of time, such as 0-30 days, 31-60 days, and over 90 days.
While simple in sound, the aging report provides valuable insights that help businesses:
Accurate aging reports give a very clear view of the health of cash flow in your business. It is, therefore, a great way to make sure that receivables are managed. Here's how it can help:
Here’s how one can come up with a reliable aging report:
1. Extract Data from Your Accounting System
Most accounting software, be it Xero or QuickBooks, will literally let you create an aging report in very few clicks. Choose the date range, and voila-export your report.
2. Group Invoices by Age
Next, group your outstanding invoices by the following age categories:
3. Add Customer Contact Information
Include telephone numbers and email addresses through which your collection team can immediately get in touch with overdue clients.
4. Data Analysis
Look for patterns, such as customers who keep showing up regularly in the 61 to 90- or 90+-day brackets. These could be your high-risk clients that may call for additional follow-up actions such as late payment penalties, or even credit limits.
Pro Tip: Also, to be more precise, allow your aging report to include unused credit memos. This is important, as it might affect an actual receivables total if not considered.
When deployed usefully, aging reports simplify and inform your accounts receivable process in several ways:
1. Tellng You to Schedule Automated Reminders and Follow-ups
You can automate an email or SMS payment reminder for different aging categories. When accounts reach certain milestones, such as 60 days overdue, trigger escalations or late fees.
2. Detecting an Increase in Late Payment
Prepare a report to automatically escalate any overdue account. After 90 days, consider offering a payment plan or referring an account to a collection agency.
3. Finding the Perfect time to Impose Late Fees
If you have not already, an aging report gives a clear business case for implementing late fees. Many businesses will receive an improved payment timeline when there is a financial consequence.
One of our customers, 3IT Consulting reduced their late-paying customers by 60% after using their aging reports to inform the timing and pace of reminders and automate late fees.
Do aging reports help in cash flow forecasting?
Of course, they do. They give insight into how much of your cash is tied in receivables so you could actually plan for deficiency shortfalls. Proper forecasting will ensure that you have adequate liquidity to operate the business based on estimated operational expenses.
How is an aging report acted upon?
Create a workflow for prioritizing high-risk accounts. Trigger automated email and SMS reminders to follow up with clients the moment when the invoices become overdue.
Are aging reports only applied to accounts receivable?
No. Aging reports also show accounts payable, highlighting how long payments have been owed to vendors.
An aging report is far more than a list of overdue invoices; it has the potential to serve as a real game-changer in transforming cash flow and the whole process concerning the accounts receivable.
Reviewing your aging report on a regular basis will tell you well in advance about impending late payments so that you can maintain a healthier financial outlook.
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