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Accounts Receivable Aging
Aging of accounts receivable is easy to organize and follow. There are several variations of accounts receivable aging but all are based on a very simple formula. The basic formula is the standard 30, 60 and 90 days aging of accounts receivable.
The age of your accounts receivable is a good indicator of the efficiency of your company accounts receivable. It is also gives you a good indication of which customers require collection attention. DSO or Days Outstanding is also a good overall barometer for the aging of accounts receivable.
Standard aging of accounts receivable
The most common method for accounts receivable aging is simply to list accounts according to the amount outstanding and how long an account is overdue. Accounts are divided into 30, 60, 90, 120 and 180 days outstanding. This report is called an Aged Trial Balance or ATB, which is simply a list of accounts broken down from the aging of accounts receivable.
Once an account hits 6 months or 180 days it should be written off. Most companies get real serious about collecting their receivables once an account is over 60 days.
In some industries like the food industry, the aging of accounts receivable is done in weeks not months. In the case of the food industry most invoices are due and payable in a week. Different industries will use variations of aging in accounts receivable.
Formula for Days Outstanding or DSO
This formula expresses the overall average time, in days, that are outstanding for your accounts receivable. This formula determines if a change in your receivables is due to a change in sales, or to another factor such as a change in selling terms. A credit analyst might compare the days' sales outstanding with the company's credit terms as an indication of how efficiently the company manages its aging of accounts receivable.
The formula is simple:
Credit Sales for Period Analyzed
Aging of Accounts Receivable and triggers
Most companies will set different trigger points according to the aging of accounts receivable. Some companies will automatically list an account with a collection agency when it hits 90 days. Every industry and company should have a plan of action or trigger at each stage of delinquency.
There are other methods and formulas for gauging the effectiveness of a company’s accounts receivable. For more information give us a call or schedule a free consultation on aging of accounts receivable.
