AR aging reports: Meaning + how to use it in your SaaS company

What is an AR aging report?

An AR aging report, also known as an aged receivables report, is an accounting document that lists all your SaaS customers' unpaid invoices, categorized by the length of time they have been outstanding since the invoice date or due date.

Its main purpose is to provide a clear overview of which customers owe money and for how long, aiding in the management of collections and the assessment of financial health. The AR report meaning becomes clear when you see how it organizes outstanding balances.

Typically, an AR aging report uses standard aging buckets to group invoices. These categories usually include:

• Current (0–30 days): Invoices that are not yet past their due date or are overdue by up to 30 days.
• 31–60 days: Invoices that are past due between 31 and 60 days.
• 61–90 days: Invoices that are past due between 61 and 90 days.
• 91+ days (sometimes shown as 91–120 days and then 120+ days): Invoices that have been outstanding for more than 90 days, indicating a higher risk of non-payment.

When and why do finance teams use AR aging reports?

Finance teams in SaaS businesses regularly use AR aging reports to get a snapshot of the company's accounts receivable status. This allows teams to proactively spot potential cash flow problems before they escalate.

By analyzing the aging buckets, finance teams gain valuable insights into their collection processes. A growing balance in the older aging buckets (60+ or 90+ days) might signal inefficiencies in dunning management or the need to revisit credit policies.

The report reveals which customers are consistently late with payments, allowing for targeted collection efforts and potential adjustments to payment terms or even the withholding of services for severely overdue accounts.

Plus, the AR aging report is instrumental in assessing the overall revenue health of the SaaS business. A high percentage of receivables in the current and younger buckets generally indicates healthy collections.

Conversely, a significant portion in the older buckets can suggest potential bad debts and the need to adjust the allowance for doubtful accounts, providing more accurate financial reporting. The report also helps in calculating the average collection period, a key metric for evaluating the effectiveness of credit and collection functions.

Note: Understanding customer payment behavior, as highlighted by AR aging reports, can indirectly inform product and price management.

For instance, insights into customer payment patterns, especially about different subscription tiers or payment frequencies, might suggest opportunities to refine pricing and packaging strategies to improve customer acquisition and retention while minimizing overdue payments.

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Why do AR aging reports matter for SaaS companies?

SaaS companies rely on the predictability of regular payments, and an aging report provides the visibility needed for that predictability. Moreover, for SaaS companies dealing with high volumes of recurring or usage-based invoices, the AR aging report grows in importance.

The subscription model inherently involves continuous billing cycles, making consistent and timely payments required for sustained cash flow. So, when numerous small delays or missed payments accumulate, the compounding risk can quickly impact a SaaS business's stability.

Delayed payments strain working capital while also hinting at underlying issues with user satisfaction, the effectiveness of payment reminders, or even the suitability of pricing tiers. Monitoring the AR aging report becomes a measure to identify and handle these potential problems before they affect revenue. So, AR aging reports help identify:

1. Collection bottlenecks: By highlighting where delays are concentrated, the report can pinpoint weaknesses in the invoicing and collection processes. Are certain stages of your dunning workflow ineffective? Is there a specific communication issue causing payment lags? The AR aging report can provide clues.
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2. Credit risk by customer: The report clearly shows which customers are consistently slow or non-paying. This visibility allows for a more informed assessment of individual user credit risk, possibly leading to adjustments in credit terms or more stringent collection efforts for high-risk accounts.
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3. Trends by plan or usage tier: Analyzing the AR aging report can show payment patterns associated with specific subscription plans or usage tiers. Are customers on a particular plan consistently taking longer to pay? This might indicate issues with the perceived value of that tier or the billing structure associated with it.

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What’s included in an accounts receivable aging report?

An AR aging report provides a structured view of outstanding invoices. It organizes crucial information to help finance teams understand the current state of receivables. The layout typically resembles a table, offering a clear breakdown of how long each invoice has remained unpaid.

Below is an example of what a typical A/R aging report might include:

As you can see, the AR aging report clearly presents each customer, their outstanding invoices, and the total amount due. More importantly, it segments the overdue amounts into the established aging buckets (0–30, 31–60, 61–90, and 91+ days). The “Notes/expected payment” column provides space for details regarding collection efforts or anticipated payment dates.

Depending on the specific needs of the SaaS business, an AR aging report may also include columns like contract type (e.g., monthly, annual), plan (e.g., Basic, Pro, Enterprise), or usage type (for consumption-based pricing), offering more granular insights into payment patterns.

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How do you calculate and interpret an AR aging report?

Creating and understanding an AR aging report involves a few key steps. The aging of receivables method is rather simple:

• Step 1: List all open invoices. Begin by compiling a complete list of all invoices that have been issued but not yet paid by your SaaS customers. Include the invoice date and the total amount due for each.
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• Step 2: Determine days past due. For each open invoice, calculate the number of days that have passed since the invoice's due date. If an invoice isn't yet due, it falls into the “Current” (0–30 days) bucket.
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• Step 3: Group invoices by age. Categorize each invoice into the appropriate aging bucket: 0–30 days, 31–60 days, 61–90 days, and 91+ days.
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• Step 4: Calculate total balances per age group. For each aging bucket, sum the total amount of outstanding invoices that fall within that range. This provides a clear picture of the total receivables in each stage of aging.

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Interpreting the AR aging report

Once the report is generated, interpreting it involves looking at several key metrics and trends. Let’s zoom in on what those are:

1. Days sales outstanding (DSO): While not directly on the report, DSO is a crucial metric derived from accounts receivable data. The formula is:
   
   DSO = (average accounts receivable / total credit sales) * number of days in period
   ‍A rising DSO suggests that, on average, it's taking longer to collect payments, which could signal collection issues.
2. Average overdue amount: Calculate the average amount outstanding in each aging bucket. A high average in the older buckets (61+ days) is a red flag, indicating potential bad debts.
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3. Percentage distribution across buckets: Analyze the percentage of total receivables that fall into each aging bucket. A healthy AR typically shows the majority of receivables in the current and younger buckets. A notable percentage in the older buckets warrants investigation and action.

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Using AR aging for strategic collections

The AR aging report is a powerful tool for prioritizing collection efforts. Generally, invoices in the 91+ day bucket receive the highest priority due to the increased risk of becoming uncollectible.

Following that, the 61–90 day bucket requires urgent attention. Focusing collection efforts on the oldest outstanding balances maximizes the chances of recovering revenue that might otherwise be lost.

Note: The insights gained from diligently monitoring AR aging reports can also inform crucial aspects of your SaaS business, like enterprise billing strategies and feature gating based on payment status.

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Common AR aging mistakes to avoid

Common mistakes in AR aging reports include inaccurate invoicing, unmetered usage, misclassified terms, outdated billing data, and unreconciled usage. These mistakes can skew AR aging reports and hide true payment statuses or revenue loss.

Avoiding these pitfalls provides a more reliable view of your outstanding receivables. Here are some common AR aging mistakes to avoid in more detail:

• Invoicing errors or delays: Mistakes in invoices or delays in sending them out can lead to payment delays and inaccuracies in your aging report. Confirm invoices are accurate and timely.
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• Revenue leakage from unmetered usage: For usage-based pricing, failing to accurately meter and bill for all usage results in underbilling, which won't appear on the AR aging report as overdue but represents lost potential revenue.
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• Misclassified payment terms or grace periods: Incorrectly recording payment terms or not accounting for agreed-upon grace periods can skew the aging buckets and misrepresent when invoices are truly overdue.
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• Using inaccurate or outdated billing data: The AR aging report is only as good as the underlying billing data. Relying on incorrect or stale information will lead to an inaccurate assessment of your receivables.
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• Failing to reconcile usage with entitlements: Especially in tiered plans with usage allowances, not reconciling actual usage with purchased entitlements can lead to billing errors and disputes, ultimately affecting the AR aging report.

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How does usage-based billing complicate AR?

Usage-based pricing and billing complicate accounts receivable with inconsistent payments and increased risks of disputes based on inaccurate tracking. Unlike fixed subscription fees, usage charges can fluctuate each billing cycle, making it harder to predict payment amounts.

Disputes can arise more frequently if usage tracking isn't transparent or accurate. Plus, the timing of usage reporting and subsequent invoicing needs to be tightly controlled to avoid delays that can skew the AR aging report.

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5 best practices for managing aging receivables

Managing aging receivables is vital for maintaining healthy cash flow in your SaaS business. Here are some best practices for managing them effectively:

1. Set clear payment terms and automate reminders: Clearly communicate payment terms upfront and automate timely payment reminders before and after the due date. Proactive communication is key.
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2. Flag accounts with recurring late payments: Identify customers who consistently pay late and implement specific collection strategies for these accounts, potentially including stricter payment terms.
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3. Offer flexible plans or self-service upgrades: Providing customers with plan options that better align with their needs or allowing easy self-service upgrades can reduce dissatisfaction that might lead to payment issues.
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4. Use accurate usage tracking to prevent billing disputes: For usage-based models, provide transparent and accurate tracking of consumption to minimize billing errors and subsequent payment delays.
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5. Make sure billing infrastructure integrates with AR systems: A frictionless integration between your billing platform and AR system ensures data accuracy and facilitates efficient generation and analysis of the AR aging report.

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How does Orb improve the accuracy of AR aging reports?

AR reports are the bedrock of sound financial management for SaaS businesses. While Orb isn't an accounting tool itself, it acts as the essential engine, confirming the data that feeds your AR reports is complete, correct, and consistently current.

Orb, a done-for-you billing platform built for the intricacies of SaaS and GenAI companies, provides the precise and timely data necessary for truly reliable AR aging reports. Here's how Orb improves your financial accuracy:

• Automated real-time billing: Orb automatically bills customers based on their actual usage, eliminating manual data entry errors and making sure every billable event is captured.
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• Accurate plan logic enforcement: Orb meticulously enforces your complex pricing models and packaging rules, guaranteeing that each invoice reflects the correct plan, tier, and any applicable discounts or coupons.
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• Real-time entitlement and usage tracking: Orb actively monitors customer entitlements and their consumption in real time. This prevents overages from going unbilled and from causing customer dissatisfaction, providing accurate invoicing.
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• Eliminating revenue leakage: By capturing all billable usage and applying pricing logic flawlessly, Orb helps prevent revenue leakage that often goes unnoticed and can skew your AR.
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• Granular and transparent invoices: Orb generates clear, line-itemized invoices detailing charges for every feature, tier, and event consumed. This transparency reduces billing disputes and helps make sure customers understand their charges, leading to faster payments and cleaner AR.

Think of Orb as the meticulous data foundation upon which your accurate AR reports are built. While your accounting software analyzes the financial outcomes, Orb helps make sure the raw usage and billing data it receives is pristine.

Ready to build a foundation of billing accuracy for dependable AR insights? Explore how Orb can transform your billing process and our flexible pricing plans.