AR Aging Analysis and Collections Cadence
Purpose
Define the working AR aging review and collections cadence for a service business. Every dollar invoiced but not collected is a dollar the business funded for the customer at zero interest. The longer an invoice ages, the lower the probability of full collection: industry data consistently shows collections drop materially as receivables cross 60, 90, and 120 days past due. A defined cadence prevents the slow drift where the bookkeeper "gets to it" and the owner discovers months later that the AR ledger has six-figure balances that may never come in.
Scope
Applies to:
- Residential and commercial trade-business invoicing
- Net-due and progress-billing customer terms
- One-time and recurring customer types
Excludes:
- Cash-on-completion residential work (no AR aging applies)
- Mechanics-lien-enforcement procedures (separate SOP)
Responsibilities
- Bookkeeper or AR clerk runs the cadence steps
- Office manager / collections owns the calls to past-due accounts
- Owner / GM approves write-offs and lien filings
- Sales / project manager owns customer relationship for in-progress disputes
The aging buckets
Standard AR aging:
| Bucket | Definition | Action posture |
|---|---|---|
| Current | Not yet due (invoice date plus net terms) | No action |
| 1 to 30 days past due | Past due, within first month | Friendly reminder |
| 31 to 60 days past due | Past due, second month | Active outreach |
| 61 to 90 days past due | Past due, third month | Escalation and dispute documentation |
| Over 90 days past due | Past due, fourth month and beyond | Lien filing, collections agency, or write-off decision |
Net terms (the time between invoice date and due date) vary by customer type:
- Residential: due on receipt (no AR aging) or net 7
- Small commercial: net 15 or net 30
- Large commercial / general contractor: net 30, net 45, or net 60
- Government: net 30 or net 45 plus payment processing time
The aging is calculated from the due date, not the invoice date. A net-30 invoice issued on the 1st of the month is "current" until the 31st and enters the 1-to-30 bucket on the 1st of the following month.
The weekly cadence
The AR aging review runs every week, on the same day. Tuesday or Wednesday morning is the standard slot: late enough that last week's payments have posted, early enough to take action this week.
Tuesday morning, every week (45 to 90 minutes)
Generate the AR aging report grouped by customer, sorted descending by balance. Note which customers crossed a bucket since last week. Verify current-bucket invoices were entered, sent, and acknowledged: the most common AR error is an invoice that was never received because the email address was wrong or the customer's AP requires portal upload (an invoicing process problem, not a collections problem).
For 1-to-30 past due: friendly reminder email (invoice number, amount, due date, payment link) and note the contact. This is the highest-leverage step; recovery rate is materially higher when touched within the first 30 days. Most customers forgot or the bill is in their AP queue.
For 31-to-60 past due: phone call to the AP contact (not email; email has not worked); confirm receipt, confirm in pay queue, ask for expected pay date; document the call. Uncovers slow-payers and disputes.
For 61-to-90 past due: escalating phone call to the customer's accountable manager; written letter (certified mail for higher balances); preliminary notice or stop notice if lien rights are open; hold new work until balance current.
For over-90 past due: final demand letter; lien filing if state law and window allow; collections agency OR small-claims decision; write-off recommendation if uncollectible. Owner approves any write-off over the threshold; bookkeeper writes off below per credit policy.
The monthly review
At month-end the AR aging summary is reviewed with the owner. Key metrics:
- Total AR (and trend vs prior 6 months)
- Days Sales Outstanding (DSO) = (Total AR divided by daily revenue from a trailing 90 day period). Compare to target.
- Aging composition (percentage of AR in each bucket; current vs past due)
- Top 10 customers by AR balance
- Top 10 invoices by age
Target DSO for residential cash-on-completion business is very low (most revenue collected at completion). Target DSO for commercial-mix businesses is typically in the 30 to 45 day range; over 60 indicates a collection process problem.
Mechanics lien rights
For trade businesses doing work on real property, mechanics lien rights are the leverage on commercial accounts. Common structure: preliminary notice required within 20 to 45 days of starting work (state-specific) to preserve lien rights; lien filing window 30 to 90 days after work completion; enforcement begins within 90 days to 1 year of filing. A business that skips the preliminary notice cannot file a lien later. The notice is cheap and routine; the lien is the leverage. Every commercial job touching real property files the preliminary notice at job startup. Consult the state-specific statute (California Civil Code 8400 series, Texas Property Code Chapter 53, Florida Statutes Chapter 713).
Missed preliminary notice deadlines are the single largest collections-leverage loss in commercial trade work. A 30,000 dollar receivable that would have been secured by a lien becomes an unsecured claim worth pennies on the dollar in a customer bankruptcy. Process the preliminary notice as a standard job startup task, not a collections last-resort.
Customer disputes and write-offs
A disputed invoice does not age. Once a customer disputes in writing (or verbally and documented), the AR clerk transfers to "Disputed" status, sales or project manager takes ownership, and the dispute is resolved within 14 days. Resolution: if customer correct, credit memo and re-invoice; if not correct, provide documentation (signed scope, change order, completion photos) and re-confirm; compromise, partial credit memo plus commitment to immediate payment of the balance. Disputes aging past the resolution window go back to regular cadence with escalation.
A receivable that cannot be collected is written off (Debit Bad Debt Expense, Credit AR). This removes from the books but does not waive the legal claim. Triggers: bankruptcy with unsecured receivable; customer dissolved or out of business; diminishing returns on collection effort; approaching statute of limitations with no viable lien. Write-offs over an owner-set threshold require owner approval.
Records and retention
Retain all collection correspondence (emails, letters, lien filings, call notes) for at least the statute of limitations on the underlying contract (typically 4 to 6 years for an account receivable, state-dependent). For liened receivables, retain through the enforcement window plus any judgment collection period.
References
- Uniform Commercial Code Article 9 (secured transactions; mechanics lien is separate but related)
- State-specific mechanics lien statutes (California Civil Code 8400, Texas Property Code Chapter 53, Florida Statutes Chapter 713)
- IRS Publication 535 - Business Expenses (bad debt deduction rules)
- 26 USC 166 - Bad Debts
- Fair Debt Collection Practices Act, 15 USC 1692 (for collections agencies; not directly applicable to original creditor but informs practice)