Accounts Receivable Aging: Stop Leaving Money on the Table

Your Money Is in Their Account

Every outstanding invoice represents money you have earned but not yet received. For many small businesses, accounts receivable is one of the largest assets on the balance sheet - and one of the most neglected.

The aged receivables report is your most important collection tool. It shows you who owes you money, how much, and how long it has been outstanding. The longer an invoice goes unpaid, the less likely you are to collect it.

Reading Your Aging Report

An aged receivables report groups outstanding invoices by how overdue they are:

• Current: Not yet due
• 1-30 days overdue: Recently past due
• 31-60 days overdue: Starting to age
• 61-90 days overdue: Seriously overdue
• 90+ days overdue: Critical - collection becomes increasingly difficult

The report shows the total owed by each customer, broken down by these aging buckets.

What the Buckets Tell You

Current - These are invoices within their payment terms. No action needed, but monitor them as they approach the due date.

1-30 days - Send a friendly reminder on the day the invoice becomes overdue. Most late payments in this bucket are due to oversight, not intention.

31-60 days - This requires a direct conversation. Call the customer (not just email) and ask when payment will be made. Get a specific date.

61-90 days - Escalate your efforts. Send a formal demand letter. Consider whether this customer should be put on credit hold (no further goods or services until they pay).

90+ days - Consider engaging a debt collection agency or taking legal action for significant amounts. For smaller amounts, you may need to write off the debt as a bad debt expense.

The Statistics on Collection

Industry data shows:

• Invoices paid within 30 days: 95%+ collection rate
• Invoices outstanding 31-60 days: 85-90% collection rate
• Invoices outstanding 61-90 days: 70-80% collection rate
• Invoices outstanding 90+ days: Less than 50% collection rate

Every day an invoice ages, your chance of collecting decreases. This is why prompt follow-up is critical.

Reducing Debtor Days

Debtor days measures the average time it takes to collect payment:

Debtor Days = (Accounts Receivable / Annual Revenue) x 365

If you have $50,000 in receivables and $500,000 in annual revenue:

Debtor days = ($50,000 / $500,000) x 365 = 36.5 days

If your payment terms are 14 days, your debtor days should be close to 14 - not 36.5. A debtor days figure significantly higher than your payment terms indicates a collection problem.

Strategies to Reduce Debtor Days

Invoice immediately - Every day between completing the work and sending the invoice is a day added to your collection timeline. Invoice the same day the work is completed.

Clear payment terms - State your terms prominently on every invoice. "Due in 14 days" is clear. "Net 30" is less intuitive for many clients.

Make payment easy - Include payment options on your invoice: bank details, credit card link, PayID. The fewer barriers to payment, the faster you get paid.

Automated reminders - Set up automatic email reminders that go out on the due date, 7 days after, and 14 days after. Most accounting software supports this.

Early payment discounts - Offer 2% off for payment within 7 days. This costs you a small discount but dramatically improves cash flow. A 2% discount for 23 days early payment (7 days vs 30 days) is equivalent to earning 38% annual return on that cash.

Deposits and progress payments - For large projects, collect a deposit upfront and bill at milestones. Do not wait until the project is complete to bill the full amount.

Credit checks - For new clients with large orders, consider running a credit check before extending credit terms. It is better to discover a payment risk before you deliver the goods or services.

The Collection Process

Establish a consistent collection process:

Day 0 (due date): Automated reminder email.

Day 7: Personal email from the business owner or account manager. Friendly tone, asking if there are any issues.

Day 14: Phone call. Speak to the person responsible for payment. Get a commitment date.

Day 21: Formal email reminder. Reference previous communications. State that further action may be taken.

Day 30: Hold further goods or services. Send a formal demand letter by registered mail.

Day 45: Final demand. Set a deadline (e.g., 14 days) before escalation.

Day 60: Engage a debt collection agency or consider legal action.

Document every communication. If the matter escalates, a clear record of your collection efforts strengthens your position.

When to Write Off Bad Debts

Sometimes, despite your best efforts, a debt is uncollectable. Write it off as a bad debt expense when:

• The customer has ceased trading or gone into liquidation
• All reasonable collection efforts have been exhausted
• The cost of further collection exceeds the debt amount
• Sufficient time has passed with no response

In your books, debit "Bad Debt Expense" and credit "Accounts Receivable." If you are registered for GST, you may be able to claim a GST adjustment for the GST component of the bad debt (subject to conditions).

Prevention Is Better Than Collection

The best receivables management happens before the invoice is sent:

1. Screen new clients - Understand their payment reputation before extending credit
2. Clear terms - Set expectations from the start
3. Written agreements - For larger engagements, have a signed agreement that includes payment terms and late payment consequences
4. Regular invoicing - Do not let work pile up before invoicing
5. Relationship management - Maintain good relationships with your clients' accounts payable teams

Using Technology

Your accounting software (Xero, QuickBooks) has built-in aged receivables reporting. Use it weekly. Set up automated invoice reminders. Connect payment gateways to make paying easy.

SortBooks handles the expense side of your bookkeeping automatically, freeing you to focus on the revenue side - including chasing the money that is owed to you.

Every dollar sitting in accounts receivable is a dollar not in your bank account. Take control of your collections and watch your cash flow improve.