Improve Your AR Analysis by Using Better Aging Buckets

icon Blog on Accounts Receivable  •  posted 09/14/11

When reviewing aging, most companies break their accounts receivable portfolio into groups known as buckets. How these groupings are determined can tell a lot about the quality and direction of the portfolio. Most credit professionals use the following breakdowns:

• current;
• 1 to 30 days past due;
• 31 to 60 days past due;
• 61 to 90 days past due; and
• 91 days past due or more.

Collection calls on past-due balances often don’t start until after the 30-day mark, although a growing number of companies do call earlier. As credit professionals are well aware, the longer a debt remains past due, the less likely it is to be collected.

Changing the Buckets

Most credit executives judge the quality of their AR portfolio by changes in the buckets indicated above. While this is a reasonable method of evaluating the effectiveness of your collection staff’s efforts, there’s a better way.

Much valuable information is hidden in that first past-due bucket. Obviously, if most of the past-due accounts in that group are one day past due, the portfolio is in much better shape than if the accounts were 29 days past due. But the traditional buckets make this impossible to tell.

By dividing the bucket into two, credit pros can get a better handle on the aging. Is the first bucket (1 to 15 days) growing or the second (16 to 30 days)? The fact that the second group is growing could be a sign that customers are relying on vendor financing. If this is simply a case of payment stretching, the collection staff can let the customer know that the practice is unacceptable. But if the shift is a sign of credit deterioration in the AR portfolio, credit standards may have to be tightened.

Getting Started

Credit managers who wish to change their aging reports will probably need the IT staff to make the necessary system modifications. One way to get their involvement is to quantify the cost of the IT delay. For example, an account that is allowed to become 30 days past due experiences a 5 percent (94.9 percent minus 89.9 percent) decrease in the likelihood of being collected, on average. Investigating whether the IT programming can save even half this decrease is certainly worthwhile.

Credit and collections managers who have made this simple change have reported a decrease in their DSO figures and an improvement in their bad-debt write-offs. While you may not want to call the customer the first day an account goes past due, monitoring the aging at the beginning of the cycle does pay off.