AR is the balance of money due to your company for goods or services. This usually means you have extended credit to clients, and they have yet to pay. You can think of AR like an IOU, representing money due in the short term. AR is an asset, so this is an important report.
An AR report, at its most basic, lists all the entities that owe money to your company. It also lists and tabulates the money owed.
AR aging adds another factor to reporting. It categorizes your accounts receivable, based on how long an invoice has been left unpaid. Monitoring AR aging is an important practice for effective AR reporting.
Often, accounts receivable is one of the largest assets a company has. Any auditor will want to look closely at this to determine that the stated amount of the asset is correct. They want to ensure that receivables exist, are recorded accurately, and are collectible.
AR days refer to how long it will take to clear accounts receivable. The formula is as follows: accounts receivable divided by revenue, the result of which is multiplied by 365. Accounts Receivable Days = (Accounts Receivable / Revenue) x 365.
The calculation for aging accounts receivables is the average accounts receivables multiplied by 360 days (to avoid fractions). That figure is divided by credit sales.
When accounts receivable increases, that hurts cash flow as it means more money is owed to the company and less has actually been paid. Conversely, a decrease in AR improves cash flow as this means more cash has come to the business thanks to customers paying off credit accounts. When this happens, the amount by which accounts receivable is decreased is added to a company’s net earnings.
A higher AR turnover means your company is more effective at collecting receivables. It means that most of your customers pay debts quickly, whereas a low ratio means your company will struggle to collect.
It is hard to say exactly what percentage of past due accounts receivable is good because it varies based on industry and company. Generally, however, a percentage from 10 to 15 percent is acceptable. In some service industries, a higher percentage is expected, while in others, accounts should be paid up as soon as possible.
Reduce AR days, or the number of days an invoice is outstanding before collection, by analyzing your AR information to see where things are adding up. You may need to ensure weaker customers pay in cash, or be in regular communication to follow up with chronic late payers. You may need to put more time and effort into collecting, contacting customers and providing various forms of payment.
If your company is focused on operations versus accounting, or would like to be, it may be time to outsource! Working with an outsourced accounts receivable expert gives your company vital information, without taking staff time away from day-to-day work.
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*