How to read an accounts receivable aging report

What it shows

Every unpaid invoice falls in a bucket by how many days it is past its due date: current (not due yet), 1 to 30 days late, 31 to 60, 61 to 90, and over 90. Most reports show the total of each bucket, the totals by customer, and the invoices behind them.

What to look at first

• The total to collect, and how much of it is overdue.
• The share over 60 days: the older an invoice gets, the less likely it is to be paid in full.
• Concentration: a single customer holding a big part of what's late.
• The oldest invoice of each customer: often the one with a problem (a wrong PO, a short delivery).
• The trend: compare this month's report with last month's.

Days sales outstanding (DSO)

DSO tells you how many days, on average, it takes to collect. The usual formula: accounts receivable at the end of a period, divided by the credit sales of that period, times the number of days in it. With $180,000 owed and $300,000 of credit sales in a 30-day month, DSO is 18 days.

Compare DSO with your terms. If you sell on Net 30 and your DSO is 45, customers are paying two weeks late on average.

What to do about each bucket

• Current: nothing but a reminder a few days before the due date.
• 1 to 30 days: a reminder on the due date and a week after. Check whether something is blocking payment, like a missing PO or a delivery question.
• 31 to 60 days: call. Offer an easy way to pay: a link, a bank payment, part now and part later.
• 61 to 90 days: escalate, and consider holding new orders or credit until the account is current.
• Over 90 days: decide with your accountant whether to keep collecting, use a collection agency, or set it aside as doubtful.

Keep the report honest

An aging report is only as good as the payments recorded on it. Count a bank payment as owed until it clears, but don't send reminders while it's on its way. Record checks and part payments on their invoices, so a customer who paid isn't chased.