accounts receivable aging documentation

How to Fill Out an Accounts Receivable Aging Schedule

Last Updated on May 25, 2021 by Grey Idol

Proper account receivables management is among the key secrets to a thriving business. It helps the management identify and fix potential cash flow problems, conversely facilitating smooth-sailing operations. An excellent way to stay on top of account receivables is through an aging schedule. From what it is to why it’s of the essence, below is a detailed breakdown of everything you need to know about the aging schedule.

What is an Aging Schedule?

An aging schedule is a tabular presentation of an entity’s accounts receivables categorized by their maturity date. Through this schedule, account receivables are classified based on the following date categories:

  • Current: This column contains invoices that are within a company’s payment and credit terms
  • 1-30: Invoices that are between one and thirty days late
  • 31-60: Includes invoices that are 31 to 60 days late
  • 61-90: Account receivables that are between 61 to 90 days late
  • >90: All invoices that are more than three months past due

How is an Aging Schedule Used?

Although the specific uses vary from one company to another, aging schedule reports are generally used for the following purposes:

To Identify Cash Flow Problems

Cash flow is the lifeline of every business. Cash flow problems cause even avid business owners to make poor decisions. For instance, some lower product and service prices, consequently reducing profit margins, while others stop hiring although they have heavy labor requirements. That is why 82% of businesses fail in the first five years. By knowing the overdue receivable accounts, business managers can determine which accounts to follow to prevent cash flow problems.

To Evaluate the Efficiency of a Company’s Credit Policies

Since it’s a collection of account receivables by their due date, an aging schedule is the easiest way to evaluate the efficiency of an entity’s credit policies.

For instance, when the aging schedule shows many customers with invoices overdue for over sixty days, it signifies lenient credit policies.

In that case, the business in question should consider adjusting its credit policies. If the schedule shows many older receivables linked to one customer, it signifies a problem with the company’s collection practices.

To Determine the Right Collections Approach

With an aging report, you can quickly identify the overdue invoices and determine the right collection strategy. For instance, if most of the older receivables are attributable to a client who always pays on time, there’s no need to use an aggressive collections approach.

A gentle reminder would suffice. But if the majority of the overdue amount is linked to a chronic late payer, you may want to pursue payment aggressively.

To Determine Credit Risk

Businesses that extend credit deal with three main types of customers: those who pay on time, the slow payers who’ll take long but they’ll eventually clear up, and those who fail to settle completely. The aging schedule is the best tool you can use to tell such customers apart.

For instance, if the bulk of old account receivables are linked to one customer, he/she is ruled out as credit risk. The business may decide to stop extending credit or even stop doing business with them altogether.

An aging report can also be compared against an industry’s credit standards to determine whether the company is accumulating too much credit risk.

The Importance of an Aging Schedule

Businesses need to keep aging schedules because:

It Helps with the Factoring Process

Invoice factoring is when a company sells its overdue account receivable invoices to another company. Factoring relieves your company the hassle of chasing up customer debts, and most importantly, it is a source of working capital.

Aging schedule data is what factoring companies use to calculate the factoring rate. So, having well-compiled data on your scheduling report is an added advantage.

It Allows Businesses to Determine the Right Allowance for Bad Debt

When a business offers goods or services on credit, there’s always a chance the customer may fail to pay. This results in a permanently unrecoverable debt, popularly referred to as a bad debt.

Unfortunately, bad debts cause cash flow problems.  That is why businesses need to create an allowance for bad debt. It gives an accurate picture of an entity’s assets and may even earn you significant tax deductions.

Business managers can use the aging schedule to evaluate potential bad debts and calculate an accurate allowance, so the bad debts don’t affect cash flow.

It Helps Business Managers Identify Credit-Worthy, Clients

By comparing current and past aging schedules, you can identify clients who’re genuinely reliable and credit-worthy and those who aren’t. If a well-paying client is late in payment with only thirty days, you already know they’re credit-worthy because their payment patterns on the aging schedule are positive.

But if a customer is consistently late on a payment, they may be struggling to meet their business objectives and will only be a financial liability to your business. In that case, you may decide to sever ties with them or deny them credit.

It Facilitates Better Collections Timelines

By comparing data from different aging schedule reports, business managers can tell how their customer’s businesses work and formulate better collections timelines for timely payments.

For instance, if the aging schedule shows a particular customer clears their overdue amounts between 10th and 15th, you can pursue payment between these dates, so you’re paid on time.

How to Use Aging Schedules: An Example of an Aging Schedule and How to Analyze it

Even though an aging schedule is critical to the success of their businesses, most people don’t know how to analyze the data. If this describes you, here’s a sample of one, followed by an analysis on how to read it:

Accounts Receivable Aging Report

Example 1: Leila is an accountant at company X. She creates the following aging schedule to analyze the firm’s account receivables.

Customer Total Balance Outstanding Balance Days Past Due
1-30 61-90 >90
1 $20,000 $10,000 $10,000
2 $40,000 $15,000 $15,000
3 $60,000 $30,000 $30,000
Total $120,000 $55,000

Assuming company X has a 30-day credit period, then customer 1 paid their overdue amount on time. If customer 2 cleared their invoice within the 61–90-day period, they were 30 days delinquent.

Usually, if a customer is over 90 days late in clearing their invoices, the chances of them paying are often very slim, and their invoice is often seen as a bad debt. Therefore, company X may have a bad debt of $30,000 out of $120,000 in account receivables in this example.

Example 2: Some businesses often offer discounts to encourage customers to clear out their invoices on time. In the example below, company X has a total of $200,000 in account receivables. To incentivize customers to pay, they offer a 10% discount on all invoices cleared within 30 days. The first column shows the age of the account; the second column shows the total amount owed by all customers, while the third column shows the total value of receivables cleared within that period in percentage.

Days Past Due Amount Due %Total Accounts Receivable Value
0-30 days $60,000 50%
31-60 days $40,000 10%
61-90 days $70,000 30%
>90 $30,000 1

0%

$200,000 100%

Based on the data above, only 50% of the company’s X clients paid on time. 10% of them were 31-60 days late, while 20% took about three months to clear their invoices. As mentioned, account receivables that are past 90 days are often considered bad debts. That means company x has $30,000 in bad debts. The aging schedule above also shows company X might be struggling with cash flow problems since only 50% of its customers pay on time.

Leverage on Aging Schedules to Better Your Business

An aging schedule is among the best accounting tools to use if you’re looking to identify reliable customers, accurately calculate allowances on bad debts, and most importantly, maintain a healthy cash flow.