An aging report, also known as an accounts receivable aging report, is a financial document that categorizes a company’s outstanding invoices based on the length of time they have been due. It shows the amounts owed by customers and divides them based on how long they’ve been past due (e.g., 0–30 days, 31–60 days, 61–90 days, more than 90 days).

A 2022 analysis of 250,000 invoices found that an invoice that remained unpaid after 90 days had only an 18% chance of being paid. Aging reports help businesses identify invoices with the highest risk of nonpayment so they can focus their collection efforts accordingly.

Below, we’ll cover why aging reports are important for businesses, how to create and interpret aging reports, and how to address common issues revealed by them.

What’s in this article?

• Why aging reports are so important for businesses
  
• What’s in an aging report?
  
• How to create an aging report
  
• How to interpret aging reports
  
• Common issues revealed by aging reports and how to address them
  

Why aging reports are so important for businesses

Aging reports help businesses identify trends and strategize for the future. Here’s how aging reports can guide business decisions:

• Credit risks: Aging reports offer insight into which clients are reliable and which might pose credit risks. This enables more informed decision-making regarding customer relationships and credit terms.

• Cash flow: Aging reports identify which receivables are at risk of delay or default. This helps businesses forecast cash flow more accurately, identify potential financial bottlenecks, and preserve liquidity for core operations.

• Growth strategies: With aging reports, businesses can better align their growth strategies with real-time receivables performance.

• Payment processes: Aging reports reveal inefficiencies in invoicing and collection processes and guide improvements that can reduce days sales outstanding (DSO)—the average number of days it takes to be paid.

What’s in an aging report?

An aging report includes several key components that provide a comprehensive view of a company’s accounts receivable. These are the main elements of the report:

• Customer information: The names or IDs of customers with outstanding invoices

• Invoice details: Invoice numbers, dates issued, and due dates

• Outstanding amounts: The total amount owed by each customer, separated into individual invoice amounts

• Age buckets: How overdue each unpaid invoice is, typically categorized as 0–30 days, 31–60 days, 61–90 days, and more than 90 days

• Total outstanding receivables: A summary of all outstanding amounts across all customers

• Collection notes or status: Any notes on collection efforts such as follow-up calls, payment promises, and disputes

• Credit risk indicators: Any signs or indicators of high-risk accounts to prioritize collection actions or reassess credit terms

How to create an aging report

Creating an aging report requires comprehensive invoice and order data and a thorough understanding of your business’s credit management practices. Here’s a step-by-step guide to creating this kind of report.

Gather data

Collect data from your accounting or enterprise resource planning (ERP) system. This data should include all outstanding invoices, customer information, invoice dates, due dates, invoice amounts, and any notes on payment status or disputes. Ensure the data is up-to-date, accurate, and reconciled against the general ledger to avoid discrepancies that could undermine the report’s reliability.

Establish age buckets

Determine the aging categories (also known as buckets) that make sense for your business. The standard aging buckets are 0–30 days, 31–60 days, 61–90 days, and over 90 days, but you can customize these categories based on your specific business model, industry standards, or risk management policies. Consider creating additional categories like “Current,” “Disputed,” “In Payment Plan,” or “Legal Action Pending” for a more detailed approach.

Sort data by age buckets

Calculate how long each invoice has been outstanding by counting the number of days between the invoice due date and the current date, then sort or categorize these invoices into their respective buckets. Use conditional formulas or aging functions if you’re using spreadsheets in Excel or Google Sheets, or configure automated rules in your accounting software.

Segment data by risk profile

Segment customers based on risk profiles like payment history, creditworthiness, or account size. This segmentation can identify high-risk customers and help prioritize collection efforts. Add layers of analysis by separating invoices by type (e.g., product sales, service contracts) or by department or region, depending on your business structure.

Add notes and next steps

Remember to add notes on past collection efforts and next steps. This might involve adding columns for the status of each invoice (e.g., “First Reminder Sent,” “In Dispute,” or “Payment Plan Agreed”). Incorporate a section for action items or next steps to make the report a more dynamic tool for collection teams.

Calculate key metrics

Include financial metrics like DSO, average collection period, and aging balance percentages for each category. Consider adding weighted risk factors to overdue amounts based on historical customer behavior to provide a more nuanced view of potential risk exposure. These metrics help gauge the overall efficiency of your receivables management and inform decision-making.

Visualize data

Use data visualization tools such as pivot tables, charts, and specialized software dashboards to present aging data in an understandable format. Dashboards with heat maps, risk indicators, and trend analysis can help identify high-priority accounts or segments at a glance. This visualization helps stakeholders quickly assess the overall state of receivables and make informed decisions.

Review and validate

Regularly review the aging report with relevant stakeholders, including finance teams, credit managers, and sales departments. Ensure the data aligns with actual customer interactions, and address any discrepancies promptly. Validate the report against actual payments received to refine future reports and collection tactics.

Consider using accounting software, ERP systems, or dedicated accounts receivable management tools that can automatically generate aging reports. You can also implement automated reminders and escalation workflows for easier collection efforts.

How to interpret aging reports

Even if you don’t have to create aging reports, you need to be able to interpret them and understand what they mean. Here’s how to interpret an aging report:

• Receivables: Look at how your receivables spread across different aging buckets. If most of your receivables are in the “Current” or “0–30 days” range, that’s a good sign. But if you see a lot in the “60+ days” or “90+ days” buckets, that could mean your customers are struggling, your credit policies need a refresh, or your collection efforts aren’t efficient.

• High-risk customers: Focus on customers with substantial overdue balances, especially those sitting in the older buckets. These are your high-risk accounts that might need a nudge or an adjustment to their credit terms. Examine whether these are repeat offenders who always pay late. And if so, consider lowering their credit limit or shifting them to a cash-on-delivery basis.

• Segmentation: Break down the aging data by customer type, industry, or region to see which groups are paying on time and which aren’t. Look for trends in how your customers are paying. Accounts that are slow to pay but important to your business might require a more personalized approach than smaller, higher-risk accounts.

• Collection strategy: Compare your current aging report with previous ones to see if the situation is improving or not. If your receivables are aging more now than they were last quarter, your collection process might need a revamp or you could be seeing a reaction to larger market trends. Evaluate recent collection efforts to assess their effectiveness in securing payments.

• DSO: Review your DSO to see how long, on average, it takes to collect payment after a sale. A high or climbing DSO means you’re taking too long to collect, which could indicate a problem with your credit policy or your collection process. Break down your DSO further by customer type, product, or region to determine where you might need to focus more collection efforts or adjust terms.

• Cash flow: Use the aging report to identify potential cash flow problems. If you have a high volume of receivables in the older buckets, that means cash payment might be delayed. This could affect your ability to cover expenses. Review the aging report alongside your cash flow statements to see where you might need to prepare, and consider options such as short-term financing and negotiating better payment terms with your own vendors, if needed.

• Predictive analytics: If your aging report includes predictive analytics, use this insight to address potential problems. Forecast which accounts might be late on payment based on past behavior and broader economic conditions, and adjust your plans accordingly. Pay attention to any broader trends reflected in your aging data and think about how they could impact your future receivables.

Common issues revealed by aging reports and how to address them

Aging reports can identify important issues in your accounts receivable. By categorizing who owes you, how much you’re owed, and for how long, you can spot patterns and problems that need attention. Here are some common issues revealed by aging reports and practical steps to address them.

High concentration of overdue receivables

When a large portion of your receivables is stuck in the “60+ days” or “90+ days” buckets, that could mean you have unreliable customers, ineffective collections, or even a general slowdown in payments across your customer base. Prioritize follow-ups with customers who have high overdue balances and consider tightening credit terms for these accounts or implementing stricter credit checks before extending further credit. Automated reminder systems can also help ensure consistent follow-up.

Slow collections and rising DSO

A rising DSO indicates you’re taking longer to collect cash from sales. This might result from deficient collections, inefficient invoicing processes, or overly generous credit terms. Review your processes for any bottlenecks or delays and ensure invoices are sent out promptly. Offer multiple payment options and digital invoicing to make it easier for customers to pay.

Consistent late payments from key customers

If you notice that some of your major accounts are appearing in the overdue buckets regularly, this could signal a deeper issue such as dissatisfaction with your service, a lack of communication, and liquidity problems on the customers’ end. Reach out directly to these key customers to understand any underlying issues and explore flexible payment arrangements or revised terms. Consider offering early payment discounts or incentives to encourage on-time payments without damaging relationships.

Disputed invoices and billing errors

Aging reports can reveal whether a lot of invoices are stuck in older buckets due to disputes or errors such as incorrect billing details, unfulfilled services, and product issues. Establish a fast-track process to resolve disputes, whether through a dedicated team or by creating more communication channels with customers, and improve invoice accuracy by double-checking all details before sending and ensuring your terms and conditions are clear.

Concentrated receivables with a few large customers

If a large portion of your receivables stems from a handful of customers, a late payment from just one of these accounts can severely impact your operations. Diversify your customer base to spread the risk and maintain regular communication with large accounts. Offer proactive payment plans or check-ins to avoid issues that could delay payment.

Recurring late payments from small accounts

Consistent late payments from small accounts can accumulate and create a drain on resources, if managed improperly. Consider implementing stricter payment terms for smaller, higher-risk accounts or moving these customers to prepayment or cash-on-delivery terms. Automate reminders and follow-ups to minimize manual effort.

Customer communication gaps

Sometimes, overdue invoices are a result of poor communication. Customers might not even be aware they owe money or could have questions that haven’t been answered. Send invoices promptly, follow up with reminders, and make it easy for customers to contact you with questions or concerns. Maintaining good relationships can often solve collection problems before they start.

Inadequate follow-up and collection

If overdue invoices linger without much movement between aging buckets, it could suggest that your follow-up and collections are not aggressive or structured enough. Develop a more proactive collection strategy with clear escalation steps, from friendly reminders to formal collection actions.

Seasonal patterns affecting receivables

Aging reports might reveal seasonal trends in late payments, indicating that some customers or industries face periodic cash flow issues. Incorporate these patterns into planning by adjusting payment terms seasonally or offering flexible payment plans during off-peak periods. Be proactive about these trends to keep customer relations strong while protecting your liquidity.