Fidesic Blog | Accounts Payable (AP) Automation for Dynamics GP

What is an Accounts Receivable Aging Report?

Written by Carl Robinette | Jun 24, 2021 4:00:00 AM

Accounts receivable is the money owed to the company for goods and services rendered and is listed on the balance as a current asset in accounting. An account receivable is the amount of money owed by a customer for purchases made on credit. The accounts receivable process includes establishing a payment period for credit issued, evaluating receivables liquidity, collecting payment and reporting, including an accounts receivable aging report. Once payment is collected the bill is no longer an accounts receivable item and is reported as revenue.

 

What Is an Accounts Receivable Aging Report?

In the simplest terms, an accounts receivable aging report is a list of all your unpaid customer invoices and credit notes compiled by date range. It is common to use 30-day intervals on an aging receivables report with a column listing unpaid invoices for the last 30 days, another column listing the previous 30-day period and so on.

 

 

Why Receivables Aging Reports are Important

An AR aging report is important because it is a primary tool used in a business's collection efforts and is vital to improving your accounts receivable turnover ratio (more below). Receivables aging reports help to identify overdue customer payments and prioritize them for collections. It may also be a key indicator of your company's ability to issue credit and collect, and it may indicate which customers are consistently falling behind on their payments. Lastly, it gives you a snapshot of your outstanding revenue and can impact decision making and financial planning.

 

What is An Accounts Receivable Example?

Most service companies have an accounts receivable system in place. An energy company for example provides electricity on credit to its customers. The electric bill you receive from them is for services rendered. Your bill with them is therefore part of the electric provider's accounts receivable until you pay it. Other examples may include a franchisor organization which collects royalties from its franchisees. For goods rendered, a common accounts receivable example is B2B suppliers and distributors who deliver truckloads of goods to retailers, manufacturers, etc. Invoices issued by the supplier are an accounts receivable item.  Related: 5 Benefits of Accounts Receivable Software for Franchise Companies

 

Accounts Receivable Metrics

What is an Accounts Receivable Turnover Ratio (ART)

Your accounts receivable turnover rate or ratio indicates how many times in a year your business collects the dollar amount reflected in your average total accounts receivable for a given period.  For example, if your accounts receivable turnover for a period is 10/1 or 10, that means you can collect that amount ten times in one year. Your ART helps you measure the performance of your AR department.

If you are interested in learning more about what an ART is, how to calculate it and how to increase an accounts receivable turnover ratio, check out our post: 7 Tips to Improve Your Accounts Receivable Turnover Ratio

What is an Accounts Receivable Cycle?

An accounts receivable cycle is the set amount of time between bills issued. An accounts receivable cycle may impact your AR turnover ratio but it is different from a turnover ratio in that your turnover indicates the speed you collect payment by dollar amount. An account receivable cycle reflects time between bills issued.  Some businesses bill on a monthly, bi-monthly, quarterly or yearly basis. A short account receivable cycle is often better for cash flow but longer cycles may be easier to manage for small businesses and certain industries. Automation may be able to help shorten an account receivable cycle by removing manual data entry for faster processing.

What is an Accounts Receivable DSO?

Days sales outstanding or DSO is the average time it takes for credit issued to be collected as cash. A high DSO means on average, your customers are taking too long to pay their bills.

What is an Accounts Receivable Allowance for Uncollectible Accounts?

Some customers don't pay and their account becomes a “bad debt” and is considered uncollectible. All businesses that issue credit know this comes with the territory. Some businesses estimate the amount of bad debt they expect ahead of a given timeframe for more accurate forecasting, planning and reporting. This amount is usually based on the percentage of bad debt the company has historically seen.

 

What Are Accounts Receivable Challenges?

The accounts receivable process can be difficult and tedious when performed manually. Managing and maintaining your receivables with automation can eliminate redundant data entry to speed up the entire accounts receivable process. Other common challenges faced in accounts Receivable include the following:

  • High DSO
  • Overdue invoices are missed or not followed-up on
  • Overdue invoices are too hastily written off as bad debt
  • Data entry errors
  • Payment errors
  • Incorrect payment allocation
  • Disorganization of files

 

How Automation Can Help

Collecting receivables is a costly endeavor for any business and can cause major headaches, especially for SMBs. With accounts receivable automation software you can streamline your receivables tasks with automatic payment reminders to your customers, online payment portals and improved data insights.

Further Reading: 7 receivables automation functions to get paid faster and reduce collections costs

However, not every AR automation solution includes support for receivables aging reporting. When selecting AR automation software, it is critical to choose a solution that supports aging reports to simplify reporting and ensure you are getting the most accurate and timely data possible.

 

If you are a Microsoft Dynamics GP user and you're still just getting by with GP's built-in AR features, Fidesic AR can help you turbo charge your reporting and collections efforts so can get paid faster and reduce your collections overhead.