Receivables ageing

What it means

An aged receivables report is an overview of unpaid customer receivables broken down by how long they are overdue. Typical bands are not yet due, up to 30 days, 31 to 90 days, 91 to 180 days, 181 to 360 days and over 360 days overdue.

It shows which customers pay on time and which do not, what share of receivables is at risk, and whether customers’ payment discipline is improving or worsening. It is related to DSO, which expresses the average collection period, but gives a more detailed picture customer by customer.

The ageing report is the basis for allowances for doubtful debts, for decisions on customer credit limits and for banks, which often require it for receivables financing or working capital loans.

How it works in practice

We send clients an aged receivables report monthly with a brief comment on the largest overdue items. Management can see whom to call, whom to send a reminder and with whom to consider suspending further deliveries.

At year-end, we use the ageing report to set allowances. For long-overdue receivables we assess whether collection is realistic and book an allowance accordingly. Tax deductibility is assessed under the Income Tax Act rules.

Before year-end we recommend confirming balances with the largest customers. Differences often reveal unrecorded credit notes or payments applied to the wrong invoice, so the ageing report better reflects reality.

What to watch out for

An ageing report is only as accurate as the payment matching behind it. If payments are matched wrongly, for instance because the variable symbol is missing, receivables appear unpaid when they have been paid, and vice versa. The report then leads to needless reminders or a false picture of customers.

Ignoring old receivables is another risk. Receivables more than a year overdue with no collection steps are approaching the limitation period. If the company does not act in time, it may lose both the ability to collect and the tax write-off.