Setting up an accounts receivable (A/R) aging schedule is a critical accounting tool for every successful business because it allows owners to manage outstanding invoices and continually gauge the financial health of their business.
A typical aging report lists unpaid invoices by date ranges; consolidating all invoices that are less than 30 days overdue, more than 30 days overdue, more than 60 days overdue and more than 90 days overdue.
However, the importance of having an A/R aging report goes beyond simply having a snapshot of the customers that have fallen behind on their payments. Although, falling behind can be a sign of an underlying problem, understanding how to use the report rather than just reading it provides insight into your customers’ habits.
For example, having no clients more than 60 days overdue likely means that your business is running smoothly (financially, at least). But, consistently having certain clients wait until as close to the 90-day mark as possible to pay is an indication that it’s time to reconsider how you manage your invoicing.
One tactic is to invoice at the beginning of every month for monthly services rather than at the end of every month. Your client (or clients) are already in the habit of paying at the 90-day mark, so by billing them ‘before’ services are provided, payment will technically be received sooner. It’s a simple cash flow management strategy that is based solely on understanding the habits reflected in your A/R aging report.
And once you recognize habits, you better understand whether a client simply delays paying or whether an invoice (or invoices) needs to become a collections issue.