Best Practices for Effective AR Reporting

How AR Reporting Helps Eliminate Cash Flow Nightmares

Accounts receivable (AR) reporting gives your business insight into outstanding invoices and money owed to the company. Any time you make a sale or render service and are not immediately paid, you have receivables. If you extend too much credit, your accounts receivable may increase to the point that impedes cash flow.

The only way to know if AR is increasing, decreasing, or staying the same is with reporting. This takes the guesswork out of cash flow and helps your company make decisions for the future. AR indicates how liquid your company is and how easily you can cover obligations without other cash flows. 

What is AR reporting?

What is AR?

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.

What is an AR 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. 

What is aging in AR reporting?

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.

Why is an accounts receivable aging report important?

The financial health and cash flow of your company are both impacted by AR aging. It also indicates the financial health of your customers who owe you money. When accounts are not being collected quickly, or collection time is slowing down, it is a sign to investigate further.

There are a few reasons your AR may be aging. Your business itself could be in a down swing in terms of how much you are selling or serving. Or, your customers could be riskier than they have been previously, or becoming chronically late payers who need a change in their credit allowance.

Why is an accounts receivable report needed for an audit?

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.

How do you read AR reports?

AR reports, particularly AR aging reports, are categorized based on length of time. Typical categories are current, or invoices that are due right away, 0-30 days, 31-60 days, 61-90 days, and 90+ days. Your reports may be organized slightly differently, but should be set up similarly.

AR aging reports usually flag the difference between immediately due, due within the next payment period, and overdue, by the various degrees an invoice can be overdue. 

The report may also show how much is owed, and how many days it took a client to pay.

How to prepare an AR report?

How are AR days calculated?

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.

How do you calculate AR aging?

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. 

How to improve business cash flow with AR reporting

How does a decrease in AR improve cash flow?

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. 

Is a high accounts receivable turnover good?

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. 

What is a good accounts receivable percentage? 

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.

How to improve your AR days

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.

When should you outsource AR reporting?

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. 

How an AR analyst can help with AR reporting

An AR analyst can manage and prepare billing for your company, ensuring these processes run smoothly for the business’s financial health. They may process invoices, collect payments, reconcile accounts, and of course, create financial reports. An accounts receivable analyst is highly skilled in what they do, which means your business benefits from their expertise without having to manage the job in-house.

Reach out to our expert team today to see how we can help your company manage cashflow better through accounts receivable reporting.

*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.*

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