Ageing tool for accounts receivable

Why do you have to do an ageing analysis?

The Accounts Receivable Aging Analysis is a central tool in financial management to measure client timeliness of payments and assess credit risk. By classifying all arrears by time of occurrence, enterprises can clearly see which amounts are being overdue, thereby introducing targeted collection measures.

Core value of ageing analysis

1. Estimated potential losses(b) Under the principle of “the longer it is not easy to recover”, the ageing analysis is the standard for the preparation of bad debts. By grading, the profit statement can more accurately reflect the business ' s profits and losses.
2. Optimizing customer credit policies: If a certain group of customers are in “more than one year” age zone for a long time, this indicates that the original credit lines or term setting are too loose and need to be tightened in a timely manner.
3. Improved cash flow forecasting• Clarify the distribution of the recovery cycle, which allows the financial team to estimate more accurately the cash inflows available for the coming month and avoid the breakdown of the financial chain.

Three Key Performance Indicators (KPIs)

• DSO (days of turnover due): Measure the average number of days between the issuance of tickets and the receipt of the purchase price. The lower the DSO, the more efficient the funds.
• Bad debt preparation coverage: Ratio of total bad debt preparedness to total arrears. It reflects the thickness of the firewalls that enterprises can withstand against financial bad debts.
• Weighted average ageing: The average of all arrears weighted by their amount and number of days reflects structural risks more deeply than a single DSO.

How can the repayment be accelerated and risk reduced?

Establishing credit rating systems• Price discounts or extended term for customers with good credit records; Payment to the delivery of goods (COD) is implemented for customers who are often overdue.

Introduction of third party tools: Consider transferring claims or entrusting professional legal/receiving bodies to a revolving valuable liquidity despite the costs involved in this case, for a persistent debt of more than 2 years.