Aging receivables

Aging receivables
See also

Aging Receivables is a report showing the outstanding receivables arranged based on the length of time they are outstanding[1]. Usually the receivables are divided into 30-day categories aged from the invoice issue date. Armed with that information the company is able to see how much outstanding receivables are overdue and for how long. The report is being prepared periodically and it is used by companies mainly to manage their cash collection in an effective manner. It can be also a good indicator of the financial condition of some of company's customers.

Benefits of using Accounts Receivable Aging

The aging receivables reports can be useful when it comes to a variety of fields[2]:

  • Receivables management and monitoring. The receivables management is crucial for the company to be able to collect the money from its customers. Money today is always more valuable than in the future and the longer the overdue receivables age, the harder to get the payment[3]. Company's management therefore needs to monitor the outstanding receivables situation on a constant basis and make sure that the cash collection team is putting the effort needed.
  • Allowance for doubtful accounts. The aging receivables report is also used as a tool to determine which receivables are not going to be paid at all. Those are being subtracted from Accounts Receivable and recorded on an account called Allowance for Bad Debt[4]. The receivables that are being put under investigation are usually the ones that are past due date for more than 60 days. The decision is being made by the management after consulting with the cash collection specialists.
  • Customers evaluation. Aging receivables can be also a good indicator of our customers' financial condition. If the company is dealing with chronically late payers, it needs to assess if the customer did not became credit risk and would it not be wiser to stop doing business with that customer.

Importance of accurate aging

Quite often a company sets up its aging mechanism for 30-day intervals aged from invoice issue date (this can be also caused by some limitations of the receivables applications). This approach would be fine if all the invoices would have 30 days payment term. Unfortunately that is not always the case. This can lead to some of the company's receivables aging status being incorrect. For example, an invoice with 60 days payment term will show as past due just after 30 days when in fact the customer still has 30 days to make the payment. That can lead to many misunderstanding between the collector and the customer. It can also potentially damage collector's morale and confidence[5].

Key notes

Here are the most important takeaways regarding Aging receivables[6]:

  • it is a report linting unpaid invoices and credit memos arranged by data ranges (most of the case it is 30-day buckets),
  • primarily it is used to determine which invoices are overdue for payment but can be also used for potential bad debts estimation, customer evaluation or cash flow forecasting.

References

Footnotes

  1. Bangs D. H., (2010), p. 267
  2. Salek J. G., (2005), p. 132
  3. Walker D. L., Larch S. M., Woodcock E. W., (2004), p. 187
  4. Mansoom K., (2014), p. 25
  5. Salek J. G., (2005), p. 132
  6. Bangs D. H., (2010), p. 267

Author: Kamil Juszczuk