What is Accounts Receivable Aging?

One of the key elements in any workable accounts receivable management program is to provide periodic reports that show the aging process for outstanding invoices issued to customers for goods and services rendered. The process of accounts receivable aging is the means whereby those reports are compiled and provided to the proper officers of the organization.

Accounts receivable aging is a valuable component of being able to structure an operating budget for the company. Understanding the existing payment habits of customers and matching that with the need for steady revenue into the company so it can meet its outstanding obligations helps to ensure that the organization will have funds in hand by a given date to take care of operating costs. Without maintaining a constant vigil on the flow of revenue into the company, it is impossible to construct and work within a solid budget.

For example, if your company bills clients on thirty-day terms, but the largest clients consistently pay closer to forty-five days, it is a smart move to secure payment terms to your vendors that reflect that business reality. Failure to know the difference between the desired term of payment and the average payment range used by most of your customers will result in a company strapped for operating capital, because it made obligations that it cannot meet within an acceptable time frame. This will negatively impact your relationship with your vendors, which in turn could impact your ability to operate and serve your client base.

Second, accounts receivable aging is an excellent tool when it comes to strengthening ties with clients. If a periodic report shows that a regular customer has an outstanding invoice over ninety days, but has paid even invoices sent thirty days ago, that is an opportunity to contact the customer and ask about the status of the invoice. Quite often, the invoice may have simply been mislaid, and the payment can be cut immediately once the issue is made known. Courteous inquiries of this nature would not be possible if accurate accounts receivable aging is not maintained.

Moving one step further, accounts receivable aging can help indicate when it may be time to sever a relationship with a customer. If the aging periodic report consistently shows that the client is having trouble paying invoices in a timely manner, it may be time to look into the financial health of that company. Many companies will use accounts receivable aging to determine if some sort of investigation is necessary. For example, a client who consistently has invoices falling into the ninety to one hundred twenty day period before payments are made could very well be about to fold.

Rather than continue to offer services that will eventually have to be written off as bad debts, use the accounts receivable aging to avoid this sort of problem. Notify the client that your company will not be able to provide further services unless outstanding receivable balances are brought up to date and some sort of advance payment arrangements are made for future use.