Aging receivables

Aging receivables
See also
Accounts Receivable Aging Current portion of long-term debt Aging schedule Performance analysis Comparative statements Time period concept Statement of affairs Exception Item Defensive interval ratio

Aging Receivables is a report showing the outstanding receivables arranged based on the length of time they are outstanding. 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:

• 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. 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. 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.

Key notes

Here are the most important takeaways regarding Aging receivables:

• 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.

Examples of Aging receivables

• The first example of Aging Receivables is a report that shows the outstanding receivables that are more than 30 days past due. This report is used by companies to determine how much money is owed to them and how long it has been outstanding. In addition, this report can be used to identify any customers who are not paying their invoices in a timely manner.
• Another example of Aging Receivables is a report that shows the amount of receivables that are less than 30 days past due. This report is used by companies to identify customers who are paying their invoices promptly and to determine how much money they can expect to receive in the near future.
• A third example of Aging Receivables is a report that shows the total amount of receivables that are outstanding. This report is used by companies to determine how much money they are owed and how long it has been outstanding. It is also used to assess the financial health of their customers and to identify any potential issues with their payment process.

Limitations of Aging receivables

• Aging receivables have some limitations that should be taken into account when using this report. Firstly, the report does not reflect the full picture of a company’s financial condition. As receivables can be paid late, companies may have higher receivables but still be financially secure. Secondly, the report does not take into account the size of the receivables. A large amount of receivables due can be paid much later than the smaller ones, but the report does not reflect that. Thirdly, the report does not reflect the customer’s payment habits. This can lead to an incorrect assessment of the customer’s reliability. Finally, the report does not provide information about the reasons of the late payments, which can be useful for further analysis.

Other approaches related to Aging receivables

• One approach to managing receivables is to set up a system of reminders for customers to pay their invoices. These reminders can take the form of email, text message, or telephone calls, and can be tailored to the customer's payment preferences.
• A company can set up a system of incentives for prompt payment. This could include discounts for customers who pay their invoices within a certain time period or cash bonuses for customers who pay their invoices early.
• Companies can also use a third-party collection agency to collect overdue invoices. These agencies typically charge a fee for their services, but they can be an effective way to recover outstanding receivables.
• Finally, companies can negotiate payment plans with customers. This can be a good solution for customers who are unable to pay their invoices in full, but still want to maintain a good relationship with their suppliers.

In summary, there are several approaches to managing receivables, including setting up reminders, offering incentives, using collection agencies, and negotiating payment plans. Aging receivables is one tool that companies can use to help them keep track of outstanding invoices, but it is not the only way to manage accounts receivable.

References

• Bangs D. H., (2010), A crash course on financial statements for small business owners, Entrepreneur Media Inc., United States of America
• Mansoom K., (2014), The entrepreneurs' dictionaru of business and financial terms, Partridge, Malaysia
• Salek J. G., (2005), Accounts receivable management best practices, John Wiley & Sons, Inc., United States of America
• Walker D. L., Larch S. M., Woodcock E. W., (2004), The physician billing process: avoiding potholes in the road to getting paid, Medical Group Management Association, United States of America

Footnotes

Author: Kamil Juszczuk