For many small business owners, extending credit to customers seems like a no-brainer since it can be a great way to attract customers and build profitable long-term relationships with them.
Credit is convenient and will probably win customers, but sales revenue will be delayed for either the discount period or the credit period, or perhaps longer if the customer is late in making the payment.
Business owners and those responsible for the day to day task should understand that the analysis of receivables method is based on the assumption that the longer an account receivable is outstanding, the less likely that it will be collected. Accounts receivable constitute the primary source of incoming cash flow for most businesses, so you should analyze these invoices in aggregate to ascertain the health of the underlying cash flows.
The analysis of receivable method is applies as follows:
Step 1: The due date of each account receivable is determined
Step 2: The number of days each account is past due is determined. This is the number of days between the due date of the account and the date of the analysis.
Step 3: Each account is placed in an aged class according to its days past due which is typically aged as follows:
Step 5: The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class
Step 6: The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each ages class.
The preceding steps include summarizing an aging schedule and this overall process is called aging the receivables. An example of a business’s aging report is provided below.
A detailed process such as accounts receivable should be an extensive documented process for any business. This process will ensure cash flow is managed appropriately by those responsible. Fontenot & Associates Solutions LLC can support with the development and analytical process of the monthly accounts receivable, we are just a click away.
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