# Aging schedule

Aging schedule is the one of commonly used indicators of accounts receivable collection efficiency. It has a form of a table, usually created by accounting software. It can be used to monitor whether customers pay in time, as well as whether the company pays to suppliers on time.

## Description of the Aging schedule

The Aging Schedule is a popular accounts receivable tool and is widely referred to in the normative accounting and finance literature. It comprises a classification of outstanding balances according to the period of time they have been outstanding:

${\displaystyle P_{t}={\frac {r_{t}}{\sum \ r}}}$

or stated in 30 day categories:

${\displaystyle Current={\frac {r_{1}}{\sum \ r}}\;\;\;\;\;\;\;\;\;\;30\,Days={\frac {r_{2}}{\sum \ r}}}$
${\displaystyle 60\,Days={\frac {r_{3}}{\sum \ r}}\;\;\;\;\;\;\;\;\;\;90\,Days={\frac {r_{4}}{\sum \ r}}}$
${\displaystyle 120+\,Days={\frac {\sum \limits _{t=5}^{\infty }r_{t}}{\sum \ r}}}$

Where

${\displaystyle P_{t}}$ - the proportion of accounts receivable "t" financial periods in the past.

${\displaystyle r_{t}}$ - the total accounts receivable sourced from credit sales issued t financial periods in the past.

These age categories usually are calibrated according to days, weeks or months, which depends on an organization's requirements, and are often expressed as a percentage relative to the total accounts receivable balance. In case if all debts are collecting on time, most debts should be younger, and only few should be older. It is assumed that percentage of debt in the older categories would be reduced by increase collection efficiency.

Prediction of the timing of accounts receivable collections is an important element of the forecasting cash flows process. It would be ideal if the exact time, from the billing date to the payment date, always were known in advance for each debt. Such knowledge could be aggregated for all accounts, and accurate forecasts could be made from this source of cash receipts. But in real the strategy of payment of due invoices depends on strength of supplier and possibility of negotiation. Similarly in case of customers. The company usually wants to keep as many invoices as possible in first category and not let them to move to other categories.

## Weakness of the Traditional Aging Schedule

Aging Schedule by the analizing of accounts receivable balances should provide collection efficiency indicators. However, accounts receivable balance of companies is depend on the both credit sales and collections and by this way balance of accounts receivable changes when either credit sales or collections are made. Because both credit sales and collections affect the balance of accounts receivable, it is difficult to identify whether a change in this balance has been caused by a change in credit sale activity, a change in collection activity, or both of them.

The Aging Schedule is expressed in percentages, with the total of all categories equalling 100%. This calculation means that all of categories will change when anyone of the accounts receivable categories will altered. This interdependence generate trubles during the interpretation a change in a particular category. This problem of interdependency in an Aging Schedule is most visible at time of observation of changes in credit sales.Rise of credit sales will result in a schedule exhibiting increasing values in the younger categories, thereby a misleading suggestion of collection efficiency increased for the older categories. As a result, an Aging Schedule can be seen to represent a tool that accurately depicts collection efficiency only in periods of evenly occurring credit sales. By this way it is poissible to conclude that the Aging Schedule can produce an incorrect analysis and false warning patterns can be provide by normal sales fluctuations. One can conclude also that the sum of credit sales observed in the last 30 day period is positively correlated to the current category in a traditional Aging Schedule.

## Correcting the Aging Schedule

Corrected Aging Schedule should also display accounts receivable as a percentage schedule, where each of the age categoriws show the percentage of total accounts receivable contained within that category. It is possible by the inclusion of the information about credit sales in the percentage calculation:

${\displaystyle P=({\frac {r_{1}}{s_{1}}}\;{\frac {r_{2}}{s_{2}}}\;...\;{\frac {r_{t}}{s_{t}}})}$

Or more concisely:

${\displaystyle P_{t}={\frac {r_{t}}{s_{t}}}}$

Where

${\displaystyle P_{t}}$ - Aging Schedule percentage category for financial period ${\displaystyle t}$.

${\displaystyle s_{t}}$ - the total credit sales ${\displaystyle s}$ generated in period ${\displaystyle t}$ which means that corrected Aging Schedule use the total credit sales within each period:

${\displaystyle s=(s_{1}\;s_{2}\;...\;s_{t})}$

${\displaystyle r_{t}}$ - the total accounts receivables ${\displaystyle r}$ generated by credit sales from period ${\displaystyle t}$. Accounts receivable are divided into age categories matching the periods used for the credit sale:

${\displaystyle r=(r_{1}\;r_{2}\;...\;r_{t})}$

One can conclude that in the corrected Aging Schedule the accounts receivable categories, ${\displaystyle r_{t}}$, are transformed into percentages of their original sales, ${\displaystyle s_{t}}$, creating a percentage Aging Schedule, ${\displaystyle P_{t}}$.

The traditional Aging Schedule relates credit sales over a longer period to accounts receivables balances, and corrected Aging Schedule relates accounts receivable categories to their original credit sales. This corrects for the shortcoming of the Aging Schedule, because removes period interdependencies from the measure. Categories are no related to each other now as they are no longer required to sum to 100%.

## Examples of Aging schedule

• An aging schedule is a report that shows the amount of time that has passed since an invoice has been sent, and the amount outstanding. It can be used to identify which customers are overdue on their payments and which customers are paying on time. For example, if an invoice for $500 was sent 90 days ago, the aging schedule would show that$500 is 90 days past due.
• Another example of an aging schedule is a report that shows the amount of time that has passed since a supplier invoice has been received, and the amount outstanding. This report can be used to identify which suppliers are overdue on their payments and which suppliers are paying on time. For example, if an invoice for $500 was received 30 days ago, the aging schedule would show that$500 is 30 days past due.
• A third example of an aging schedule is a report that shows the amount of time that has passed since a customer has been invoiced, and the amount outstanding. This report can be used to identify which customers are overdue on their payments and which customers are paying on time. For example, if an invoice for $500 was sent 60 days ago, the aging schedule would show that$500 is 60 days past due.

Aging schedule is a useful tool to monitor and manage accounts receivable collection efficiency. It has several advantages, including:

• It gives an overview of the company’s outstanding payments and enables easy tracking of customer payments, allowing for better cash flow management.
• It helps to identify and address any payment delinquencies quickly, before they become a problem.
• It provides an early warning system, allowing businesses to take action before any significant losses occur.
• It can be used to analyze the effectiveness of collection efforts, providing insight into which customer accounts are the most profitable and which need to be addressed.
• It can be used to compare and benchmark accounts receivable collection performance over time.
• It enables businesses to plan their cash flow more reliably, as they have an accurate view of upcoming customer payments.

## Limitations of Aging schedule

Aging schedule is a useful tool for monitoring accounts receivable collection efficiency, however, it has some limitations. These include:

• Timeliness: Aging schedule only provides information on the accounts receivable at a particular moment in time. It does not provide an indication of any changes in payments over time.
• Accuracy: Aging schedule is only as accurate as the data that is entered into it. It is possible that errors or omissions in the data could lead to incorrect analysis.
• Incomplete information: The information included in an aging schedule may not be complete. It may not include details such as the customer’s payment history or credit terms.
• Limited perspective: An aging schedule only provides information on the accounts receivable. It does not provide any information about accounts payable or other liabilities.
• Difficulty of analysis: Analyzing an aging schedule can be difficult and time-consuming. It requires a thorough understanding of the data and the ability to interpret the information correctly.

## Other approaches related to Aging schedule

An aging schedule is one of the most common indicators of accounts receivable collection efficiency, usually created by accounting software in the form of a table. There are also other approaches that can be used to monitor customer and supplier payment times, including:

• Credit Management System: This system creates a centralized database of customers, suppliers, and other financial contacts. It includes performance tracking, credit scoring, and automated document management.
• Risk Analysis: Risk analysis is a process used to identify potential risks to a business and evaluate their impact. It includes assessments of customer and supplier payment times, financial stability, and payment history.
• Financial Analysis: Financial analysis is a process used to evaluate a company's financial performance and position. It includes analyzing customer and supplier payment times, accounts receivable turnover, and accounts payable turnover.
• Cash Flow Forecasting: Cash flow forecasting is the process of predicting the future cash flow of a company, based on historical data. It includes analyzing customer and supplier payment times and trends.

In summary, an aging schedule is an important tool for monitoring customer and supplier payment times. However, there are also other approaches that can be used, including credit management systems, risk analysis, financial analysis, and cash flow forecasting.

 Aging schedule — recommended articles Accounts Receivable Aging — Comparative statements — Aged debt — Account Analysis — Doubtful account — Average collection period — Horizontal Analysis — Accounting method — Beacon Score — Shareholder value added

## References

Author: Mykyta Yezhevskyi