Account Receivable Aging

Account Receivable Aging, often simply referred to as Aging, is a process in financial accounting that categorizes a company’s accounts receivable by the length of time an invoice has been outstanding.

This technique helps businesses to identify invoices that are overdue for payment.

The relevance of Account Receivable Aging lies in its ability to pinpoint potential cash flow issues. By segregating receivables based on their age, businesses can identify customers who consistently pay late or are likely to default, enabling them to take timely action.

Regularly monitoring the aging schedule can also support the company’s credit policy adjustments and contribute to better financial health.

Here is the formula to calculate account receivable aging with an example:

Account Receivable Aging Formula:

Aging Bucket % = (Amount in Aging Bucket / Total Amount Receivable) x 100

Example:

A company has the following account receivables:

Current (0-30 days): $50,000

31-60 days: $30,000

61-90 days: $20,000

Over 90 days: $10,000

Total Amount Receivable: $50,000 + $30,000 + $20,000 + $10,000 = $110,000

To calculate the aging percentages:

Current (0-30 days) Aging %

= (Amount in Bucket / Total Amount Receivable) x 100

= ($50,000 / $110,000) x 100

= 45.45%

31-60 days Aging %

= ($30,000 / $110,000) x 100

= 27.27%

61-90 days Aging %

= ($20,000 / $110,000) x 100

= 18.18%

Over 90 days Aging %

= ($10,000 / $110,000) x 100

= 9.09%

So in this example, 45.45% of the total account receivables are current, 27.27% are 31-60 days, and so on.

An Account Receivable Aging Report is generally broken down into columns that represent aging periods such as 0-30 days, 31-60 days, and so on. By leveraging a clear view of your receivables age through software tools like Gantt charts or resource allocation tools, businesses can efficiently categorize and track their invoicing.

In the below example, Company B has an invoice over 90 days old, which might be a cause for concern.

While both Account Receivable Aging and Account Receivable Turnover are methods used to manage receivables, they serve different purposes.

Aging focuses on the overdue status of specific invoices, allowing businesses to follow up on late payments using strategies like efficient project financial management. On the other hand, Account Receivable Turnover measures the effectiveness of deal management in ensuring timely payments.