Understanding Accounts Receivable Aging (AR Aging)

As a small business owner, let’s be honest, few things are more frustrating than not getting paid.

You’ve done the work, sent the invoice, and then… nothing. And it’s not just you: in the US alone, over half (55%) of invoices become overdue, many of which are unpaid. 

That’s where an accounts receivable aging report comes in, sorting all your unpaid invoices by how long they’ve been overdue.

Now, you don’t have to be an accountant to get value from this. We’re going to walk through the basics, answer the big questions (like what goes into one and why they're brilliant to do) and then we'll show you how to actually work out your company's accounts receivables and improve your company's financial health.

What is AR Aging? (What is accounts receivable aging?)

Accounts receivable (AR) aging is just a way businesses keep track of who owes them money and for how long.

Instead of looking at one big pile of unpaid invoices, accountants break it down by age. Which ones are just a little late? Which ones have been sitting there for months? More concerning still, which ones might never get paid at all?

This helps the company make smart decisions about who needs a friendly reminder, who might need a call from a collections agency, and which debts they should probably just write off and move on from.

TIP: Check out our guide on making payments painless for more payment techniques.

Purpose of aging the accounts receivable

There are three main reasons that you should be getting an accountant to (or doing it yourself) age the accounts receivable.

1. Improve managing cash flow and working capital.
2. Identify overdue accounts, high‑risk customers, and support collection efforts.
3. Inform adjustments to credit policies and estimate doubtful accounts.

Let's explore this in a little more detail.

1. Think of cash flow as the blood running through a business; it keeps everything alive. By aging your receivables, you can see which payments are coming in soon and which ones are dragging on. That way, you know how much money you actually have to work with. This'll help you plan for bills, payroll, and future expenses instead of being caught off guard.
2. Not every customer pays on time, and some might not pay at all. Aging your accounts helps you spot who’s slipping behind by looking into unpaid customer invoices. Maybe they just need a reminder so you can collect payments, or maybe they’ve become a bigger risk to your business. Either way, it gives you a chance to act.
3. When you track patterns over time, you start to see which customers are consistently late. That tells you if you need to tighten up your credit policies (like asking for deposits up front or shortening payment terms). It also helps you estimate “doubtful accounts,” which just means money you probably won’t get back. Writing those customer payments off isn’t ideal, but it’s better than pretending the cash is still coming and is better cash flow management.

What an AR aging report includes

Here's what's inside every AR aging report:

Core components

• Customer information, invoice details (number, date, amount)
• Aging categories/schedule: 0–30 days, 31–60, 61–90, 90+ days (or customized buckets)
• Amounts due per category and totals
• Credit memos, payment reminders, notes on collection status

Optional enhancements

• Custom buckets like “Disputed,” “Legal Action Pending.”
• Credit risk indicators and collection notes

How to prepare an accounts receivable aging report

You know what it is and what goes into it. You also know why we need them. Now it's time to get practical. Here's how you can do them:

Step-by-step method

1. Compile all outstanding customer invoices and credit memos: Start by pulling together all outstanding customer invoices and any credit memos. Basically, you want a full list of who owes you money and what the paperwork says.
2. Set aging intervals (e.g., 0–30, 31–60, 61–90, 90+ days): Create categories based on how late the payments are. A common setup is 0–30 days, 31–60 days, 61–90 days, and then 90+ days. This way, you can see at a glance how “old” each debt is.
3. Categorize each invoice by days past due: Take each invoice and drop it into the right time bucket, depending on how many days past due it is. Fresh ones go in the first bucket; the older ones move down the line.
4. Calculate customer balances within each category and totals: Add up the balances in each category to see the totals. This shows you how much money is tied up in recent invoices versus long-overdue ones.
5. (Optional) Add notes on collection efforts or credit risk: If you want to get extra organized, you can add notes on what actions have been taken, like whether or not you’ve already sent a reminder or if the customer is at risk of defaulting.

Aging of accounts receivable formula & analysis

An accounts receivable aging report also lets you measure how efficiently your business is collecting cash.

Formula (Days sales outstanding / AR aging days)

One of the most common ways to do this is by calculating Days Sales Outstanding (DSO). The formula looks like this:

(Average Accounts Receivable × 360 days) ÷ Credit Sales.

In plain English, this formula is telling you how many days, on average, it takes to collect money after you’ve made a sale. The lower the number, the faster you’re turning invoices into cash.

So, if your DSO is low, that’s a sign your collection process is working well. In other words, customers are paying quickly, and your cash flow is healthier. A high DSO, on the other hand, might be a red flag that too many invoices are dragging on and you need to tighten things up.

Using aging analysis

Beyond the formula, the aging report itself is a powerful analysis tool:

• You can work out your allowance for doubtful accounts by looking at past trends. For example, say invoices over 90 days old only get paid 20% of the time. You can use that history to predict potential losses.
• You can also spot problem customers who always pay late. That insight helps you decide whether to change their credit terms, ask for upfront payments, or even reconsider doing business with them.

Benefits of AR aging and aging reports

Cash flow and liquidity improvement

Let’s start with the obvious one: cash flow. When businesses don’t keep track of who owes them money and when it’s due, they end up stuck waiting (sometimes for months) for cash that should already be in their accounts.

AR aging reports helps you develop a cash management technique that shines a spotlight on outstanding invoices, making it easier to prioritize collections and improve liquidity.

In short, money that was once floating around finally settles in the right place.

Better credit and collection strategies

Think of it as turning the lights on in a dark room. Instead of chasing random invoices, AR aging reports give you a clear picture of which customers owe what and how long they’ve owed it.

This means you can chase strategically, focusing first on the biggest or oldest debts, rather than just hoping payments will come through.

Even more, these reports highlight patterns. If a customer consistently shows up late, it’s a signal that you may need to adjust credit policies, like tightening payment terms or being more selective about who gets credit in the first place.

Financial reporting and risk management

Now let’s zoom out. AR aging reports are about painting a bigger financial picture. They allow you to calculate allowance for doubtful accounts, which tells you how much of your receivables may never be collected. That’s powerful not just for you, but for auditors, investors, and anyone assessing the health of your business. An AR aging report helps your financial health.

Operational efficiency & customer relations

Finally, let’s talk operations and relationships. These reports help automate and streamline collections, meaning less time wasted and less manual follow-up.

They also allow for personalized touches. Targeted reminders, early-payment incentives, small discounts that encourage timely payments while keeping customers happy.

It’s efficiency meeting customer care.

Improving your AR aging process

• Use software and automation: Don’t rely on spreadsheets and sticky notes because it's 2025 and that would be ridiculous. Instead, use a point of sale system with automated AR tools embedded into the POS software that can track invoices, flag overdue accounts, and send reminders for you.
• Regular monitoring and proactive collection strategies: Check your aging report often. This means weekly, not just at month-end. The earlier you spot overdue accounts, the faster you can take action before they spiral out of control.
• Offer early-payment discounts, set payment agreements, send reminders: Incentives work. A small discount for early payments, flexible agreements, and friendly nudges can speed up cash flow without straining relationships. Also, ask your customers if they're facing financial difficulties. Maybe there's something you can work out, like a payment plan, for instance.
• Reassess credit policies and customer risk profiles: If certain customers always pay late, it may be time to adjust credit policies (stricter term or reduced limits) to protect your business.

Summary and key takeaways

That's it from us. We've run through everything there is to know about this cash management technique. We hope, now, you can use AR aging reports confidently to boost cash flow and improve your payment processing.

Here at Epos Now, we make it simple. With our POS system’s integrated payment processing service and the ability to link apps like QuickBooks and Xero, you can track invoices, monitor aging reports, and automate reminders, all in one place. Less chasing, fewer late payments. More cash flowing into your business where it belongs.

Get in touch with our team today.

Liked this blog? Check out our additional payment processing resources:

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• Payment Reconciliation