Aged Receivables

Definition

The term aged receivables refers to metrics that state the percentage of receivables that are older than a given number of days. Aged receivables allows a company to understand the effectiveness of their credit policy and collection practices as well as the likelihood a receivable will ever be paid by the customer.

Calculation

Aged Receivables = Outstanding Receivables over XX Days Old / Total Outstanding Receivables

Where:

  • Outstanding receivables over xx days old is typically stated in increments of 30 days and can extend to as long as 180 day timeframes. The older the receivables, the less likely the money will ever be collected from a customer.
  • Total outstanding receivables is the total of all credit sales currently outstanding.

Explanation

Accounting and finance metrics allow a company's internal analysts to understand how well its accounting and finance departments are operating. This is usually assessed by examining metrics such as error rates, transactions processed, discounts taken, and turnaround times. Accounting and finance metrics allow the company's management team to identify areas where changes can be made that will improve their key operating metrics. One of the ways to learn about the effectiveness of the company's credit policy and collections process is to calculate its aged receivables.

A company's accounting, finance and collections departments are usually accountable for determining the policy that allows customers to make purchases on credit. Once a sale on credit occurs, it is the responsibility of the company's accounts receivable and collections teams to manage the dunning processes which will attempt to collect the dollars owed the corporation. One of the ways to measure the effectiveness of these policies and processes is to measure the company's aged receivables.

Typically, the analysts tasked with measuring these values will work with the collections department to determine the timeframes of interest. For example, if a receivable is due in 30 days, then it's appropriate to look at the percentage of receivables over 30 days old. This same organization will want to analyze receivables due in 30 day increments, such as 60 and 90 days. Based on historical collections success, the company will understand the likelihood of ever collecting the money due. For example, a company might expect to collect 95% of receivables over 30 days old, while only expecting to collect 5% of receivables over 180 days old. At a certain point, the company's policy might be to sell the receivable to a collection agency at which point they might receive $0.03 on every dollar owed.

Example

The CFO of Company ABC wanted to understand if a recent downturn in the economy was causing receivables to grow as well as an estimate of the bad debt expense to be reported in the next quarter. She asked her analytical team to determine the aged receivables and pass that information over to the collections team to develop the bad debt estimate. The team found the following:

  30 Days 60 Days 90 Days
Aged Receivables $6,931,000 $3,810,000 $1,193,000
Total Receivables $15,300,500 $15,300,500 $15,300,500
% Aged Receivables 45.3% 24.9% 7.8%

Based on the above information, the collections team was able to provide the CFO with an estimate of the quarterly write off for bad debt.

Related Terms

average processing timebest possible DSO, bad debt percentage