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The sum of the products from each outstanding date range provides an estimate regarding the total of uncollectible receivables. This was all possible because the company performed an accounts receivable aging process. This helped the company ABC not only tide over a financial crisis, but also improve its quality of service, which resulted in the Company ABC gaining more business. Aging is considered the most important information when analyzing accounts receivables with ages above an appropriate number of turnover days that will negatively affect a company’s operations.
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The general rule is when accounts receivables remain outstanding for a long period of time. The aging schedule may identify recent changes in accounts receivables, which may protect your business from cash flow problems. The company’s management should generate aging reports monthly to know about the due invoices and notify customers accordingly. Another issue is to not use an excessively long time period to derive the historical bad debt percentage, since changes in the economic environment may have altered the loss rate. Instead, consider using the historical loss rate for the past 12 months on a rolling basis. As a business owner, the last thing you want is to sell your products or services and not get paid or be paid late.
A good AR aging percentage will vary by the industry and credit terms the company offers. You can find the AR aging percentage by dividing the total amount of receivables that are over 90 days past due by the total amount of receivables outstanding. This aging of receivables method formula 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.