Accounts Receivable Aging - Formula and Calculations

An accounts receivable aging report allows businesses to track unpaid customer invoices and any unused credit notes. It organises these amounts based on how long they’ve been outstanding. They’re usually divided into 0-30 days, 31-60 days, or beyond. A look at this report helps gauge the financial health of a business and check the reliability of its customers.

Research by Upflow shows that over half of unpaid invoices (57%) are overdue, and a third (33%) take over 90 days to get paid¹. An accounts receivable aging analysis is helpful in such scenarios as it allows businesses to be proactive and follow up on payments for prior bills.

Read on to learn more about accounts receivables aging, how it works, and the benefits it carries for UK businesses.

We’ll also touch on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What is accounts receivable aging and how does it work?

Accounts receivable aging is a capital management tool that signals when some customers turn into credit risks. The company can determine whether they should keep doing business with those who’re paying late.

A recent survey by Capital on Tap reveals that small businesses in the UK are waiting for a total of £7.4 billion in unpaid invoices². Besides the small entities, this is an impending issue for big business owners too.

Here are the typical elements that are covered by an accounts receivable aging report:

• Invoice details: Includes the invoice number, issue date, and total amount due.
• Customer information: Lists the customer or company name, along with optional contact details or an account number for reference.
• Aging categories: Breaks down how long invoices have been overdue, such as 0–30 days, 31–60 days, 61–90 days, and over 90 days.
• Amounts due: Shows the amounts owed in each ageing category for each customer, along with the total due per customer and an overall total for all receivables.
• Credit memos: Notes any unused credit memos that apply as a credit on an invoice.
• Comments: May include a section for notes on collection efforts, payment arrangements, or other relevant details.

The use cases of accounts receivable aging schedules and reports vary from business to business. For example, a small manufacturing business can use an accounts receivable aging report to monitor overdue payments.

When the report reveals that £15,000 in invoices are overdue, with £5,000 outstanding for over 90 days, the company can use this information to follow up with customers in the 90+ days category and offer payment plans to reduce bad debt. This helps improve cash flow and identify clients who may require stricter credit terms.

Why is an accounts receivable aging report important?

An accounts receivable aging report provides essential statistical information about current customers’ payment history. It analyses the effectiveness of collection funds and helps finance departments to make critical decisions.

A few reasons why accounts receivable reports are important are:

• Instant identification of complexities: Monitoring these reports regularly helps to maintain a healthy cashflow by identifying credit risks likely to hit them over time. The financial teams and managers can decide which customers are eligible for cash-only transactions and which should stay on credit terms.
• Optimises collections: It spots customers with a late payment history. The company can then adjust its credit policies to collect the dues.
• Enhances financial planning: The report gives a clear picture of what to expect in the future. The management can figure out the expected cash flow from receivables and make informed financial decisions.
• Predicts bad debt: Knowing about the aging accounts receivables helps to forecast bad debt. The finance teams can estimate the number of accounts they won’t be able to collect. They can prepare for upcoming cash flow issues and make mitigation plans.
• Improves business relations: These reports can help a business to identify customers who’re in a financial crunch. They can communicate to reach a mutual decision that’s a win-win for both. This nurtures a positive customer relationship.
• Pause services or supplies: A good look at customers with delayed payment profiles empowers the managers to withhold supplies or services from certain customers. They can send alerts to settle the outstanding bills before a deadline. This keeps cash flow problems from escalating.

A survey by Intuit Quickbooks shows that late invoices affect 73% of UK businesses, causing various problems³. These include strained relationships with vendors, poor credit ratings, and time consumption of finance teams.

An accounts receivable aging analysis can play a central role in keeping the business on firm grounds. Apart from identifying the problem clients, it helps the finance teams to judge their credit policies. If the cash flow problems persist and most customers fail to make timely payments, it indicates a need to change the credit policies.

How to calculate accounts receivable aging

So far, we’ve established that the aging of accounts receivable can harm a business in many ways. A detailed report enlists the outstanding balance of every client. The business can then estimate future write-offs by looking at the percentage of accounts over 180 days past due.

Following a step-by-step method and using correct calculations can help your company have valuable documents in case of a financial audit.

Accounts receivable aging method

An aging report shows customer invoices and how long they’ve been unpaid. For businesses that let customers pay later, this report helps track invoices and their due dates. It also counts the total invoices due for each customer according to the age of the invoices.

The accounts aging receivable schedule sorts the invoices into the following categories:

• Current – invoices that are due right away
• 1–30 days overdue
• 31–60 days overdue
• 61–90 days overdue
• Over 120 days overdue

Ideally, a company should generate this report monthly. It helps the management to take a good look at the invoices that are soon due. They can also send reminders to the customers about invoices that are beyond due dates.

The core steps of creating an accounts receivable report are as follows:

1. Gather all invoices.
2. Decide on time ranges (e.g., 0–30 days, 31–60 days).
3. Sort invoices based on how long they’ve been unpaid.
4. Add up the amounts owed by each customer in each time range.
5. Calculate the total amount due in each time range.

Instruct your finance team to update the reports on a timely basis. This task is highly important to ensure you have valuable documentation during financial audits.

Aging of accounts receivable formula

The aging of accounts receivable formula is:

AR aging days = (average accounts receivable × 360 days) / credit sales

This formula is used to calculate the average number of days it takes for a customer to pay their invoices. Knowing the average collection time can help your finance team to make further decisions about approaching or dealing with particular clients.

Example:

Suppose today's date is January 22, 2025, and you have the following invoices:

Invoice Number	Invoice Date	Amount	Days Outstanding	Aging Category
01	10-01-2025	£500	12	0–30 days
02	15-12-2024	£1,000	38	31–60 days
03	5-10-2024	£800	109	Over 90 days

This method helps to monitor overdue amounts and signals the business to take proactive measures.

Best practices when analysing aging accounts receivable

An aged accounts receivable report provides the business with a historical overview of the company’s receivables portfolio. You can use this report to investigate the following concerns:

• Credit policies: Review how well credit policies and practices work. Check if payment terms are clear, late fees are applied, and rewards for early payments are offered. Large or frequent overdue balances may mean the policies are too lenient or followed improperly.
• Default accounts: Find out which customers are late paying their invoices and how long they’ve been overdue. Pay close attention to accounts far past due, as these need urgent action.
• Bad debts: The longer an invoice stays unpaid, the less likely it is to be paid. According to the 2022 Due analysis, there’s only an 18% chance of payment if it’s overdue by 90 days⁴.
• Repeated patterns: Watch for patterns that point to bigger problems, like frequent delays from certain customers or disputes over specific products or services causing late payments. Track which periods have the most unpaid bills.

Now, use the insights gained from accounts receivable aging analysis to refine your current credit policies. Try to adopt strategies that can improve the overall management process and keep capital afloat.

How to create an accounts receivable aging report

Businesses can prepare reports manually or use software that extracts information from the accounts receivable ledger. Some tools also have the feature of sending auto-reminders to the customers.

Moreover, the reports can be customised and cover supplemental information like payment agreement, past collection experiences, or communication with the clients.

When doing it manually (using Excel), the steps are:

1. Make a table with columns for customer names, invoice dates, amounts, and due dates.
2. Add extra columns for aging categories like "0-30 days," "31-60 days," "61-90 days," and "90+ days."
3. Count how many days each invoice is overdue.
4. Put each invoice in the correct aging category based on its due date.
5. Add up the amounts in each category to find out the total amount due for each group.

Alternatively, there’s an option to use specialised software with aging report features. These include:

• QuickBooks
• Zoho
• Xero
• FreshBooks
• Wave

These tools have advanced features and make a calculation of accounts receivable aging quite simpler. A clean look at the receivable status can help businesses with some fundamental decision-making!

Frequently Asked Questions (FAQs)

Here are some common questions and answers on accounts receivable aging:

How often should I run an accounts receivable aging report?

You should run the report regularly. Fix a period, like a month or a week, and make sure you’re generating reports following that schedule.

What can I learn from an accounts receivable aging report?

It highlights the customers who are slow to pay and helps to estimate the portion of total receivables that may be uncollectible. This can help you make essential capital-related decisions as you’re aware of what’s coming next.

What is a good aging percentage?

A good goal is to have 70-80% of invoices paid within 30 days.

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Consider accounts receivable aging as a financial report that helps your business assess customer creditworthiness and decide whom to continue working with.

Inconsistent reporting can lead to inaccuracies, affecting financial decisions. To maintain accuracy, it’s vital that management ensure reports are generated regularly and reliably. And when it comes to receiving the payments, there’s always an option to go for a non-banking alternative like Wise Business.

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Sources used:

1. Credit Connect - Over half of invoices paid late
2. On The Tools - Small businesses suffer from £7.5 billion in unpaid invoices
3. Quickbooks - The impact of late payments on businesses
4. Due - How Long Should it Take to Get Paid as a Business Owner?

Sources last checked on date: 19-Feb-2025