How to Set Up and Analyze an Aging Schedule

Monitor your Accounts Receivable to Obtain Payment on Past-Due Accounts

If your company offers credit to your customers, you need a collections policy. One part of that collections policy is to monitor your receivables by developing an aging schedule.

Why an Aging Schedule for Accounts Receivables is Important

An aging schedule is a way of finding out if customers are paying their bills within the credit period prescribed in the company's credit terms. 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 to drive 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 Aging Schedule and How to Analyze it

Here 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.

Aging Schedule

 Age of Account Amount % Total Value of Receivables 0-10 days \$20,000 20% 11-30 days 40,000 40% 31-60 days 20,000 20% 61-90 days 10,000 10% Over 90 days 10,000 10% \$100,000 100%

The credit period for this firm is 30 days, so the second line of the aging schedule is 11-30 days. For this company, 40% of the customers pay their bills during the credit period but after the discount period.

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 and or most companies, this is not enough.

A full 40% of the company's customers are delinquent with their payments.

20% are 31-60 days delinquent, 10% are 61-90 days delinquent, and 10% of the company's credit customers are over 90 days past-due. That is a sizable percentage of delinquent accounts.

Usually, if a customer is between 90-120 days past due on a debt, that bill is seen as uncollectible or a bad debt. In this example, this company has \$10,000 in bad debts out of \$100,000 in accounts receivable.  Bad debts are tax-deductible, but companies would rather not have them.

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 and negatively impacts profitability.

It looks like 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.