Analyzing your Accounts Receivables!

A business may extend credit to its customers for the goods sold & services rendered to them and frame appropriate credit policy suitable to the business. Credit policy indicates the credit period that a company will offer to its customers. A credit policy should not be too liberal that it results in defaults, nor should it be too strict that it restricts sales. Ageing analysis of accounts receivables helps a business in framing an appropriate credit policy and also helps to analyze the category and quality of its debtors.

Ageing Analysis enables you to analyze the composition of your debtors and lets you realize the period for which the outstanding payments from your customers have not been received. It is used to keep a track on the average period in which the debtors are realized or payment is received from them.

Although it is known that the payment from accounts receivables for credit sales will not be received immediately, but once the age of the accounts receivables crosses the normal credit period extended, you should indeed be cautious about the pending payments. The outstandings should be received within a reasonable time so that it does not result in notional interest loss to the business.

Businesses use ageing analysis to analyze the creditworthiness of its debtors. This report can be looked into before extending credit to debtors, to minimize default risk to the business. Your auditors will also want to know the age-wise classification of your debtors and insist on providing for/ writing off debtors outstanding for long. This is because such a long overdue period indicates the probability that the customer is either disputing or not willing to pay the amount.

A far-fetched thought might also make you conclude that the credit sales were booked just to inflate the sales amount. Just to put it into some context, when Satyam Fraud was unveiled by its Chairman, Mr. Ramalinga Raju, he also shared the amount of fictitious accounts receivable booked against sales.

The ageing analysis is used to know the time period in which debtors pay for credit sales. It is prepared using slabs such as 0-30 days, 31-60 days, and so on. The days for which accounts receivables have been due is then calculated and each debtor is placed in slabs accordingly. Efforts can then be made to realize the already overdue accounts receivables or to write them off if recovery is not possible.

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