Aged debt

From CEOpedia | Management online

Aged debt means debt that is overdued by at least one ( or more) period of time, e.g. 30 days. Analysis of aged debt is one the most prestigous tool of management in respect of showing at a glance the status of debts within the total (B. Edwards 2004, p. 31).

Aged Debt Analysis

There are two types of Aged Debt Analysis (B. Edwards 2004 p.200):

  • "detailed aged debt analysis sequenced as invoice within customer within ledger section with each invoice in its edge slot, or in any format specified by the user
  • summer aged debt analysis ('the prime tool'), with one line per customer, representating total aged debt for each account, by region, by salesperson, by product or again in any format specified by the user."

Aged Debt Analysis is often related to the Aged Debt Report or Agded Receivables Analysis. It is main source of information using for collection activity. This analysis can also show a single line balance for one, particular account aged in months or days. Aged Debt Analysis is main tool used by the collector; from the input which was created during a course of an accounting period ( usually a month) a statement of account showing the individual balance on every account is produced ( G. Bullivant 2012, p. 229). According to G. Bullivant many companies can choose from a many formats but the basisc needs are always the same (2012, p. 229):

  • Quantity of outstandingness ?
  • How is the outstanding balance made up?
  • Quantity of the overdued outsatnding balance?
  • By how long is overdue?
  • Payment terms on the account
  • What time and how should an aged analysis of the ledger be produced?

Thanks to the Aged Debt Analysis a rolling 1 or even 12-month history can be not only on sreen display but also a hard copy. It is in effect merely a month by month repeat of the Agded Debt Analysis in the addition of the DSO (wchich means days sales outsatnding average credit taken) figures (B. Edwards 2004, p. 171). Aged Debt Analysis underlines the collectable balances in a handy way, but usually it is the statement of account which contains the make-up uf those balances (B. Edwards 2004, p. 171). It should cointain: name of cutomer and his credit data, period of time, total current and overdue debt (B. Edward 2004, p. 170).

Aged Trial Balance Analysis

Formats of aged debt reports vary enormously but they should have all 16 items required (credit risk category, DSO for account etc.) included. The reports are grouped depend on business for example by sales office, geographical area, ledger's type and so on with a final grand total (G. Bullivant 2012, p. 368).

Examples of Aged debt

  • Accounts receivable: Accounts receivable consists of overdue invoices that a business has not yet collected on. This type of aged debt can arise from customers who are late on payments, or from customers who are unwilling or unable to make payment.
  • Unpaid credit card bills: Unpaid credit card bills are a type of aged debt that can arise when a customer is unable to make their monthly payment due to financial hardship.
  • Unpaid loans: Unpaid loans can be a form of aged debt when a customer is unable to make their loan payments due to a change in their financial circumstances.
  • Unpaid utility bills: Unpaid utility bills are a type of aged debt that can arise when a customer is unable to make their monthly payments due to financial hardship.
  • Unpaid taxes: Unpaid taxes are a form of aged debt when a customer fails to pay their taxes within the specified time period.

Advantages of Aged debt

Aged debt provides an accurate and up-to-date overview of the company’s financial health, allowing for better decision-making and cash flow management. There are several advantages of aged debt, such as:

  • It gives a clear picture of all the overdue payments that need to be collected so that timely action can be taken to recover them.
  • It also helps to identify any potential issues like increased payment defaults, frauds, and mismanagement of payments.
  • It assists in creating a credit policy that is tailored to the company’s specific needs, to reduce the risk of bad debts.
  • It allows for better forecasting of cash flows, as well as predicting potential problems and taking proactive steps to address them.
  • It helps to identify any customers who may be at risk of defaulting, so that preventive measures can be taken.
  • It allows for better budgeting, as the company can better assess the resources needed to manage their debts.

Limitations of Aged debt

Aged debt is a useful tool for understanding the current status of debts in a company. However, it is not without its limitations. These include:

  • Difficulty in accurately assessing the true level of aged debt. Aged debt analysis typically relies on historical data, which may not reflect the current status of debt. This may lead to an incorrect assessment of the true level of aged debt.
  • Difficulty in accurately predicting future debt levels. Aged debt analysis does not take into account the potential for future income or expenditure, and therefore is not a reliable predictor of future debt levels.
  • Difficulty in assessing the impact of debt on cash flow. Aged debt analysis does not provide a clear indication of the impact of debt on cash flow, which is necessary for making effective financial decisions.
  • Difficulty in assessing the effectiveness of debt collection processes. Aged debt analysis does not provide an accurate assessment of the effectiveness of debt collection processes, which are necessary for maintaining a healthy financial position.

Other approaches related to Aged debt

In addition to aged debt, there are several other approaches used to analyze debt. These include:

  • Ratio Analysis: This involves calculating the current ratio, quick ratio, and debt-to-equity ratio to determine the financial health of a company.
  • Cash Flow Analysis: This involves analyzing the cash flow of a company to determine its ability to meet its obligations.
  • Leverage Analysis: This involves analyzing the company's debt-to-equity ratio and the amount of debt used to finance operations.
  • Credit Analysis: This involves evaluating the creditworthiness of the company, its customers, and its suppliers.

These approaches provide an in-depth analysis of the company's debt and offer insights into the company's ability to meet its obligations. Aged debt analysis is just one of many approaches used to manage debt. By using a combination of these approaches, companies can effectively manage their debt and ensure that they stay on track to meet their financial goals.


Aged debt — recommended articles
Accounts Receivable Aging — Aging schedule — Subsidiary account — Bank reference — Aging receivables — Credit Review — Horizontal Analysis — Cash Budget — Comparative statements — Purchasing in the case of discontinuities in needs

References

Author: Dominika Kuraś

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