How to read the aged debtors report
The report is not something you look at. It is four decisions that have to be taken every month.
- Counted from
- The due date
- Typical bands
- 0-30, 31-60, 61-90, over 90 days
- Standard practice in receivables ledgers
- Used for
- Prioritisation and provisioning
You can read the report band by band and know what has to happen to each group — instead of looking at the total and feeling bad about it.
The aged debtors report is probably the report that gets pulled most often and used least. It sits in every finance system, it is easy to produce, and it is usually read as a single number in the bottom right corner.
That is a shame, because the report is not a status picture. It is a priority list, where each band corresponds to a decision somebody has to take.
AccountabilityReviewed for legal accuracy by Rieck Advokater
Step by step
- 01
Count from the due date, not the invoice date
This is the error that makes most reports useless. Count the age from the invoice date and a customer on 60-day terms appears to be 45 days in arrears the day after the invoice went out. Ageing has to measure delay, not credit time.
This is where it goes wrongCheck the setting before you read anything into the report. One that counts from the invoice date turns your best customers into your worst.
- 02
Clear the paid invoices out first
A payment that has not been matched to its invoice leaves that invoice open. It therefore sits in a band it does not belong in and pushes both the total and DSO up. Finish the matching before the report is used for anything — otherwise you are taking decisions on items that have already been paid.
- 03
Look at the distribution, not the total
Two companies with the same outstanding balance can carry very different risk. If almost everything sits in the first band there is no case to answer — that is ordinary credit time that simply has not fallen due. If a quarter sits beyond 90 days there is a case, however tidy the total looks.
- 04
Give every band its own action
This is where the report turns into work. Under 30 days is chased automatically. Between 30 and 60 the formal demand should have gone out. Beyond 60 the decision to hand over is taken. Beyond 90 the question is no longer whether to act — it is whether there is anything left to recover.
This is where it goes wrongWrite the actions down once and let them stand. Decide afresh each month and the decision comes out differently each month.
- 05
Put the provision on the last band
The probability of payment falls with age, and that is precisely what the bands are good at showing. In accounting terms the last bucket is where the bad debt provision belongs — and in management terms it is where you decide whether the claim is to be pursued or written off.
This is where it most often goes wrong
Not because anyone is careless, but because the mistakes are easy to make and only surface once it is too late.
- 01
The report gets pulled but not used
A report nobody acts on is a habit. Test it by asking what happened to the items beyond 90 days last month. If nobody can answer, the report is decoration.
- 02
Every band is treated the same
The same reminder on an invoice ten days old and one a hundred days old is wasted both ways. The first did not need it; the second is past the stage where a letter changes anything.
- 03
The large items hide the many small ones
One large invoice in the last band makes the report look alarming. Thirty-five small ones in the same band look harmless and are often the more expensive problem, because they never get dealt with.