Aging of Accounts Receivable Method Definition
If you own a business, there are times when you need to offer accounts receivable so as not to lose your clients. However, you also have to monitor your ARs through the aging of accounts receivable method.
This method can help you in identifying problem and good clients based on the terms of payment.
Giving Accounts Receivable
There are times when a certain business can incur accounts receivables. These are amounts due from your customers. This is the result of delivering the items or services to customers even before the business receives cash. Operating cycles usually encounter this situation especially with regular customers. The invoice is sent to the customer and the cash will be collected later on. The receivable will exist for a certain period until cash is received. The terms should be clearly stated to avoid any problems in the future.
Not all businesses abide by COD. There are also exceptions because there are times when a certain business needs to offer an alternative or else the sale can be lost. However, you need to be aware of the aging of accounts receivable method before you can use this option. Almost all businesses these days offer delayed payment and simply mark the sale as accounts receivable. Most clients will pay up within the specified term but there are also ones who don’t monitor their obligations. There is a problem in getting accounts receivables and so it is important that you age the ARs. For instance, if the terms says that the amount is payable in 30 days, the client can pay his/her due from 0 to 30 days.
How to Age Your Accounts?
Some clients go beyond the stipulated period and may reach 31-60 days, 61-90 days, and over 90 days. You have to prepare a table for all those with accounts receivables. Take note of the clients that reached over 90 days before making the payment. The next time the client makes a purchase, you will have to stick with COD. If you have clients under the 61-90 days, you also have to monitor them closely to get the payment.
There is industry standards that you can follow based on the type of business that you’re managing. You should identify your problem clients to better manage the credit policies of your business. Just in case ARs are too long or have aged considerably, you have to work harder to collect cash. However, if the ARs are paid within the specified term, you can increase your sales by offering more of this option. Credit policies can be eased to cater to the needs of your clients. Now that you know how to carry out the method of aging of accounts receivable, you can now determine the clients who are always in default and the good ones as well. Adjust policies based on the performance of clients.
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