When you hear the word ‘aging’, you’re probably thinking about our age in that we grow old as the years go by. But, in the context of business, aging actually refers to something else.
Aging is just an accounting process that helps you know how long you have had an asset. It also tells you how long a certain bill has gone unpaid.
This is different than turnover ratios in that it takes into account specific line items which can help you address issues and also help you identify certain outliers as well.
What the accountant usually does is to list every item in an account. For example, you could factor in your outstanding invoices in accounts receivable.
Then, you will divide the items on the list by date range. You can use whatever date range you want, but typically, the 30-day interval is used. So, if an accounts receivable aging report would devote a column with all of the invoices you issued in the past 30 days, then that means that you are using the aforementioned date range. Although, you could definitely use more than 30 days like 90 or 120 days depending on your company’s needs.
Today, I am going to go over some of the most common aging reports and how it could help your business. If you do not want to delve into the finer details, you could always hire accounting and bookkeeping services in Malaysia to have all of these handled for you.
Bad Debt Allowance
When your accountant creates your company’s balance sheet, it should always accurately reflect the current financial status of your business. It should reflect all of the accounts receivables, assuming that you are at a reasonably certain rate of 100% collection.
That being said, as an example, if there is only 50% chance of collecting money on your receivables older than six months, then that information should be written down half of the value of those receivables.
Collection Practices
When you look at your financial data and you find old receivables, then that just means that you have bad collection practices. Some customers will not pay you immediately and would wait for a couple of invoices or until you call them.
It is your responsibility to follow up on any outstanding invoices, especially when the customer has a track record of paying late.
Credit Risk
When there are old accounts receivable entries in your company’s financial statement, then that means that your company is at a credit risk. If your customers have not paid at a reasonable timeframe, that could signify that they are unable to pay for the goods at all.
It would be wise to compare your overall accounts receivable aging reports against your industry’s standards to help you determine if the risk that you are taking on is appropriate for your company to survive.
Also, it helps to look at your customer base. If you find that there are some that are consistently paying late, you could adjust your payment terms or you do not do business with them.