What’s an Aging Report? A Valuable Tool for Small Businesses

business owner analyzing reports

No matter what stage your business is in, it’s always a good idea to use the tools available to you to keep it running smoothly and grow your business. An aging report keeps track of your receivables and payables by showing you how long it’s been since they’ve been paid.

Start using this report today by learning what it is and how it can help you better manage your business’s finances.

What’s an aging report?

An aging report shows you how long items in your accounts receivable and accounts payable have been outstanding. As your business grows, it’s important to have a bookkeeping system to manage your incoming and outgoing cash. Aging reports can be generated by that system so you can keep up on what you owe and what’s owed to you.

For your accounts receivable, an aging report will show you which invoices are still owed to you, including overdue payments. With your accounts payable, an aging report can show you when your bills are due, along with any that are past due.

Regularly running aging reports can help you better manage your cash flow by identifying outstanding revenue and unpaid invoices, which will keep your vendor relationships and business credit in stellar shape.

Good bookkeeping is essential for accurate aging reports

As with any financial documents, aging reports will only be as accurate as the information entered into your bookkeeping system. For that reason, you should:

  • Make sure you’re set up with a good bookkeeping software program, like QuickBooks. Talk to your accountant or bookkeeper about selecting a program, then ask them to help you set it up for your business. Having your system set up properly from the start is much easier and more cost-effective than cleaning it up in the future.

    Bookkeeping software programs can easily create invoices and track incoming payments as well as the bills that you owe, and you can create accurate aging reports in seconds. Get in the habit of running and analyzing them now, and it will make a world of difference in your cashflow and operational efficiencies.
  • Take time to review your accounting basis with your accountant when they’re setting up your system. Many small businesses are set up on a cash basis, meaning that your books show revenue as it comes in and expenses as they’re paid. For example, a small website design business may contract for a short-term project, bill a client when the project is complete, and receive payment within a specified time. That same business will have regular expenses, like software subscriptions, that are paid when due each month or year. Those expenses and income will be recorded when they’re received and paid.

    However, some small businesses should be set up on an accrual basis to reflect revenue and expenses more accurately. For example, a small construction business may have a renovation project that will span a couple of years, with payments coming in when project-related milestones are met. This business should likely use an accrual basis, which would account for its anticipated revenue and expenses. An accrual basis system can also be helpful for potential lenders and investors, as it may provide a more accurate picture of your business’s finances.

Aging cycles and liquidity

Analyzing aging cycles can give you a better sense of what’s owed to you and what you owe and a better understanding of your business’s cash flow. However, it’s important to know that this is different from liquidity.

For example, you may be owed money but don’t have cash in your bank account, which means that your business needs more liquidity. If you don’t have enough liquidity, it can delay your payables and result in fees, unhappy vendors, and/or disruptions in operations, including payroll.

Accurate aging reports will give you a handle on your business’s finances and spot potential issues before they cause more significant problems. For example:

  • If you see that you’re likely to run into a cash crunch, you can put more money in reserve ahead of time or talk to a lender about a business loan or line of credit to ease temporary cashflow shortfalls. This is a common business challenge with a relatively easy solution as long as you’re proactive and consistent in your analysis.
  • Monitoring aging reports gives you insight into mapping your business cycle by showing you when your customers are paying you in relation to when you complete the work. Let’s say you’re selling your products on a marketplace platform like Etsy or Amazon. There may be a delay between when a customer buys your product and when you get paid out from the platform. Knowing your cash flow and liquidity through aging reports can help you avoid expensive invoice- or purchase-order financing to secure the money your business needs.

If your accounts receivables are getting away from you with outstanding or overdue invoices, it may be time to tighten up your business’s credit policies. Similarly, if you’re having trouble keeping up with accounts payable, review your cashflow to see if you can automate paying invoices through your bookkeeping software.

Key metrics for aging reports

Using your aging report, you can calculate key performance indicators (KPIs), which are metrics that can help you measure how efficient you are in collections and payments. Here are a few KPIs you can start tracking:

Days Sales Outstanding (DSO): This accounts receivable report shows the average number of days it takes your business to receive payment from your customers. You can find it by dividing your average accounts receivable over a specified time period by the number of sales made in that period, then multiplying by the number of days in that period.

Aging balance: This is the combined value of your accounts receivable and payable. It’s calculated by adding the total amount of accounts receivable and payable over a specific time period.

Days Payable Outstanding (DPO): This accounts payable report shows the average number of days that it takes you to pay suppliers, vendors, and creditors. It’s calculated by multiplying your accounts payable by the number of days outstanding, then dividing by your cost of goods sold (COGS).

Pursuit has loans and lines of credit to smooth cashflow challenges

When you get your aging report system in place, you may find that you have more clients with outstanding payments than you realized – or that you owe more to vendors than you thought.

Whatever the case may be, Pursuit has more than 15 loan options that are available to help you cover a cash flow gap or leverage new opportunities to grow your business. Every day, we help business owners find the best funding solution to meet their needs. Contact us today to learn more about how we can help you.

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