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How to Set up and Analyze an Aging Schedule for Accounts Receivable

how to set up an amortization schedule

If you have made the decision that your company will offer credit to your customers. the next step is to develop a collections policy. One part of that collections policy is to monitor your receivables by developing an aging schedule for monitoring receivables.

Why an Aging Schedule for Accounts Receivables is Important

Every day that a customer is late making payment on their account costs your company money from a cash flow point of view, so preparing an aging schedule and acting upon with regard to your collections policy is an important financial management step for a business firm.

If you find that a high percentage of your customers are slow in paying their bills, you should re-evaluate your credit and collections policies and make some changes.

An Example of an Accounts Receivable Aging Schedule and How to Analyze it

At the bottom of the page is an example of an accounts receivables aging schedule for a hypothetical company.

This company has $100,000 in accounts receivable. They offer a discount if customers pay their bills in 10 days, which is the discount period. That's why you see the first line of the aging schedule as 0-10 days. Looking at the table, you can see that 20% of the firm's customers take the offered cash discount .

The credit period for this firm is 30 days, so the second line of the aging schedule is 11-30 days. This line of the aging schedule shows how many customers pay their bills on time. For this company, 40% of the customers pay their bills during the credit period but don't take the discount.

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This means that 60% of the firm's customers pay their bills on time, a combination of the customers that take

the discount and those who pay during the credit period. That's only a little over half of the firm's customers who pay their bills on time. For most companies, this is not enough.

A full 30% of the company's customers are delinquent with their payments. 20% are 31-60 days delinquent and 10% are 61-90 days delinquent. That is a sizable percentage of delinquent accounts. This company is undoubtedly suffering from a cash flow perspective because of these delinquencies. Their cash flow is probably low and they are having to borrow short-term funds in order to cover these delinquent accounts with regard to their working capital. This means they are paying interest on short-term debt, which hurts their cash flow even more.

In addition, it seems that there may be a problem with the company's credit policy. collections policy, or both. The owner needs to re-evaluate the credit and collections policy and see if the policies need to be tightened up. Perhaps they are offering credit to marginal credit customers and that needs to be stopped. Perhaps they are not collecting aggressively enough.

Last, 10% of the company's credit customers are over 90 days past-due on their accounts. Usually, if a customer is between 90-120 days past due on a debt, that bill is seen as uncollectible and as a bad debt. In this example, this company has $10,000 in bad debts out of $100,000 in accounts receivable. This is another sign that something is wrong with the company's credit and/or collections policy. Bad debts are tax-deductible, but companies would rather not have them.

This was an example of how you analyze a company's accounts receivables aging schedule. If you offer credit to your customers, this is an issue that you, as a business owner. have to deal with.

Category: Bank

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