Accounts receivable and debtor ageing are two vital concepts that all businesses should understand.

What is Accounts Receivable?

Accounts receivable, or receivables, is the value of everything debtors owe to a business. It is the sum of all a business’s outstanding invoices or the money owed to the business in exchange for goods and/or services it has already supplied.

Accounts receivable is an asset that becomes part of a business’s working capital once the debtors pay their invoices.

As an example, if a manufacturer delivers $10,000 worth of stock to its customer and that customer has been offered 30-day credit terms.  The manufacturer will have $10,000 of accounts receivable from that customer up until the customer pays for those goods.  In other words, for up to 30 days, or longer if the customer doesn’t pay on time.

It is essential for businesses to carefully monitor their accounts receivables to ensure they receive all payments by the due date. And if a customer is late in paying their debt, it’s vital that the business immediately follows up with the customer to sort out any issues that may have contributed to the late payment.


What is Debtor Ageing?

Debtor ageing is a tool that small businesses can use to monitor the status of their accounts receivable. This tool takes the form of a report that groups outstanding invoices by customer and date range. The date groupings are usually 1-30 days overdue, 31-60 days past due, 61-90 days overdue, 91-120 days past due and 120+ days overdue.

Debtor ageing serves a number of purposes. It helps small businesses:

  • track the monetary value of their accounts receivable so they know how much money is at risk of not being paid
  • determine which customers, if any, are more often late with their payments and thus are more troublesome

In general, a healthy accounts receivable shouldn’t ever contain payments that are late by more than 60 days.  Unless the business has reached an agreement with the debtor. This is because the longer an invoice remains overdue, the less likely it is that the debt won’t be collected in full — or at all.

If the same customer has more than one overdue invoice.  This should be a red flag that indicates a problem with that debtor’s cash flow. The creditor in this situation would be well served by contacting the customer to organise payment and may consider the pros and cons of discontinuing to serve the customer until all payments have been made.

Similarly, if a customer continuously pays their invoices after the due date, debtors should exercise their right to claim any late payment fee that’s detailed in their sales Agreement.

Here’s an example of a debtor ageing report:


How to Monitor Your Accounts Receivable

If you’re not currently monitoring your accounts receivable, there are a wide variety of tools available, at a very reasonable price.  These tools can help you calculate and track late payments. Be sure to use such tools regularly so you’re alerted to any issues early on. And be aware that these tools are only as good as the data you supply them with. If you forget to input sales, the software can’t track them.

You should also have a system in place for acting on late payments. When your chosen accounts receivable software alerts you to an overdue payment, you should know what actions you’re going to take and when. If you’d like some help with this, see our top tips on collecting late payments.

Once you’re accurately tracking your accounts receivable, you can also turn those unavailable funds into cash using invoice financing. This alternative funding solution can enable you to sell your accounts receivable, or parts thereof.  So you don’t need to wait for customers to pay their invoices before you can make use of those funds.



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