What is Aging of Accounts Receivable?

You want all your customers to pay on time, and even pay early. But it can happen that even the most reliable customers fall behind. Perhaps an invoice got lost in the mail, or the customer was financially disadvantaged and withheld payment. In any of these scenarios, your aging accounts receivable number will start to creep up. Here are a few things to do to get ahead of the problem.

Identifying clients who are late in paying invoices

It can be difficult to keep track of your clients’ payment history if you don’t know their financial situation. Keeping an eye on them is important, so it makes sense to run regular credit checks on them. You can also work with them to establish simpler terms and procedures for payment, such as partial payments and initial deposits. If they consistently fail to pay invoices, it could indicate a cash flow problem or credit history problem.

One way to keep track of these clients is to send them automated reminders of when to pay their invoices. Often, a late payer will pay up eventually, but the fact is that they eat into your healthy cash flow. By sending out automated reminders of upcoming invoices, you can reduce the amount of time spent on chasing late payers. If you’re having trouble getting your clients to pay, consider automating your reminders.

Make it easy for clients to pay their invoices. It’s easy to let an invoice sit on a client’s desk or email inbox for months, so make it easy for them to pay it. To make it easier for clients to pay, you can integrate a “Pay Now” button on your invoice with PayPal or invoice software. This way, they don’t have to print, write a check, and mail it. All they need to do is click a button, pay, and voila, they’ve paid it!

Monitoring internal collections practices

One of the most important aspects of monitoring your internal collections practices when aging accounts recei Vs. external collections is that you keep track of the behavior of your customers. For example, some customers are slow to settle invoices, and others may wait until the third or fourth reminder before settling their account. In this situation, it is crucial to review your collection practices and assess your risk. Moreover, monitoring your accounts receivable aging report will allow you to assess the efficiency of your collection methods and improve your business processes.

If your company relies heavily on its accounts receivable, you may need to take immediate measures to generate capital, such as fundraising or seeking investments. In this case, your accountants might develop an accounts receivable aging report and identify three accounts receivable that have been past due for a month. After gathering this information, you may send collections letters to the customers to try and collect these accounts.

In addition to improving your business cash flow, monitoring your internal collections practices can help you catch irregularities early. For example, a COVID virus outbreak can disrupt global supply chains, while deteriorating payment behavior can affect your business’s cash flow. Therefore, your collection efforts should be focused on enhancing your internal collections practices. This will ensure that you’re able to limit bad debt losses and maximise your business’s accounts receivable.

Identifying doubtful accounts allowances

In order to calculate a percentage to reserve for doubtful accounts, companies use a method known as an allowance for doubtful account. An example is an account with a balance of $10,000 and a probability of default of 10%. The amount would be grouped by age and would represent the expected amount of money that will not be paid. This method is not as predictive as the other methods but is still a helpful way to prepare for the possibility of doubtful accounts.

In an example, a company with a credit balance of $1,000,000 will report an allowance for doubtful accounts if it believes that 10 percent of its credit customers will not pay in full. This amount would be credited to bad debt expense, and the remaining ninety percent of the credit accounts receivable would be deducted from the bad debt expense. This method is useful for identifying doubtful accounts because it helps businesses manage these unpaid accounts.

Another method is to use historical write-off data to estimate a realistic allowance for doubtful accounts. Historical collection data will help businesses estimate the average write-off rate of doubtful accounts. In most cases, this method is easy to implement. Companies that have a small customer base and a simple billing cycle will find the method useful. A high ratio indicates that the allowance is excessive, and a low percentage signals that the amount is insufficient.

In conclusion, aging of accounts receivable is important to understand in order to make accurate financial projections and ensure that your company is able to receive payments for the products or services it provides in a timely manner. By keeping on top of your accounts receivable aging, you can avoid any potential cash flow problems.