A receivables aging schedule reveals patterns of delinquency and shows where you need to focus your collection efforts.
The longer accounts receivable (AR) languish, the more likely funds are to become uncollectible.
Accounts receivable are sums due from customers from the time of sale until the receipt of payment.
The time period and the terms of every receivable should be specified clearly. Terms can be stated in various ways, such as:
- Net 30 days from invoice
- Net 15 days from shipment
- 1% 10 days, net 45 days from invoice
The first term calls for payment within 30 days of the invoice date. The second term indicates that payment should be made within 15 days of the shipment date. The third term offers an incentive for early payment; for example, a 1% discount off the invoice amount if payment is made within 10 days of the invoice date. From 10 to 45 days, the customer pays 100% of the invoice.
Receivables are a use of your funds. They are, in effect, loans to customers. While every business owner hopes and expects that customers will pay their debts promptly, the reality is that AR can sometimes linger on the books until they get old.
One simple method of assessing the quality of your receivables is to compare the actual collection period, known as days receivable, to the stated payment terms. The collection period and the terms should be about the same.
If the days receivable are significantly more than the sales terms, consider developing a receivables aging schedule to monitor who owes you money, when the debt was incurred and how long it has been unpaid.
Most receivables aging schedules are broken into 30-, 60- and 90-plus-day increments. Under each of these categories, total the amount due from each of your customers. This allows you to identify the problem customers and focus your collection efforts accordingly.
An aging schedule also enables you to manage your credit policies according to the standards of your particular industry. Many software programs provide aging receivables templates and/or formulas that are handy for small and mid-size enterprises.
It is important to stay on top of your receivables. The quicker you collect your AR, the better your cash flow.
Following are some tips for collecting AR:
Be Prompt: If a payment was due in 30 days, follow up with the customer on day 31.
Be Consistent: Send regular statements to customers who are behind in their payments.
Offer Incentives: Consider offering a bonus or cash price discount for early payment.
Be Specific: Spell out any late-payment fees and penalties prior to granting terms.
Follow Up: Be aware of your customers’ payments and debts. Send acknowledgments when accounts are paid.
Be Realistic: In the final analysis, an AR aging schedule may indicate that it’s time to sever your relationship with a customer or resort to some other type of collection method.