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     Account Receivable - Monitoring Receivables

 
 

Monitoring your receivables

In previous lesson , we talked about monitoring receivable ratios to ensure that your average collection period mirrors your credit terms. It's important to watch for changes in your average collection period because this can act as an early indicator of problems. For example, if your terms of sale are net 30 and your average collection period has traditionally hovered around 29 days, that suggests that your credit and collection policies are working. If, however, the average collection period starts to climb to 40 or 50 days, this indicates that customers are taking longer to pay and you will need to reexamine your credit and collection policies.

Another way to look at your receivables is through an aging schedule or an aged accounts receivable report. This is a listing of your accounts receivable by vendor. The receivables are sorted into aging "buckets," usually current, 30 days, 60 days, and 90 days. The percentage of receivables in each bucket is calculated. If your percentages of overdue receivables start to go up, it also indicates a problem that needs addressing. Sample 7 shows an example of an aged accounts receivable report.

 

Sample:

AGED ACCOUNTS RECEIVABLES REPORT

 

 

Small Company Inc.

 

 

 

 

Aged accounts receivable

 

 

 

 

29 February 2004

 

 

 Customer

Current

30 days

60 days

90 days

Total

Jim Fox

      563.12

 

        49.97

 

         613.09

Brandywine Inc.

 

   1,712.56

 

 

      1,712.56

Merna Finlayson

      197.58

 

 

 

         197.58

 J. Morgan

 

 

 

     798.37

         798.37

 Baxter Box Co.

        47.34

      182.89

      612.49

       19.49

         862.21

Drawton Inc.

   1,983.67

 

 

 

      1,983.67

 Total

   2,791.71

   1,895.45

      662.46

     817.86

      6,167.48

 % of total

            45

             31

             11

            13

             100

 

Notice that 31 percent of the receivables are 30 to 59 days old, 11 percent are 60 to 89 days old, and 13 percent are 90 days or older. In other words, 55 percent of the total receivables are over­due. If that total shot up to 65 percent, for example, you would need to examine why your customers are paying more slowly. You would adjust your policies or enforce your existing policies as needed. Even with no change in the percentages, there still appears to be a problem with collections that should be investigated.

 
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