What it means
Ageing analysis is primarily used to assess accounts receivable - the money owed to a company by its customers. It categorises outstanding invoices into different time brackets, such as 0-30 days, 31-60 days, and beyond.
This helps businesses identify which customers are slow in paying and may need follow-up. Knowing how long invoices have been overdue is crucial for maintaining healthy cash flow.
It allows businesses to take proactive steps, like sending reminders or taking stronger collection actions when necessary. This analysis can also reveal trends, such as seasonal slow payments, which can aid in future planning.
For small businesses, keeping track of who owes money and for how long can be the difference between staying afloat and financial strain. Large companies can use ageing analysis to assess the efficiency of their credit policies and customer payment behaviour.
The information from an ageing analysis often informs financial reporting and strategic decision-making. It can highlight the financial health of the accounts receivable process and even influence credit terms offered to customers.
Think of ageing analysis like sorting through your wardrobe. Just like you organise clothes by seasons, ageing analysis organises invoices by how long they've been unpaid, helping you decide what needs attention first.
In practice
Real-world examples
Example 1
A local bakery has $10,000 in outstanding invoices. Its ageing analysis shows $6,000 is less than 30 days old, $2,000 is 31-60 days old, and $2,000 is more than 60 days old. The owner focuses on collecting the oldest $2,000 first, because those invoices carry the highest risk of becoming bad debts. The owner also checks whether the same customers appear in the older bucket each month.
Example 2
A small IT services company has $50,000 of receivables, and its ageing analysis shows that 15% of that total, or $7,500, is more than 60 days overdue. The finance manager flags those clients for a credit review and asks account managers to explain each delay. The company then tightens credit terms for slow payers and requires a deposit on new projects. The finance manager shares the result with the sales team the same week.
Example 3
A manufacturing firm with $500,000 of receivables finds that $100,000, or 20%, is more than 90 days old, well above its internal target of 5%. The company renegotiates payment terms with its largest slow payers and offers a 1% discount for payment within 10 days. The finance team reviews the over-90 share every month until it returns to target. The board receives the same figure in its monthly pack.
Think of it
Think of ageing analysis like sorting through your wardrobe. Just like you organise clothes by seasons, ageing analysis organises invoices by how long they've been unpaid, helping you decide what needs attention first.
Formula
Calculation
Share of Receivables Overdue = Overdue Receivables / Total Receivables x 100. For example, a company with $80,000 total receivables, of which $20,000 is more than 60 days overdue, has a share of ($20,000 / $80,000) x 100 = 25%. If the same company cuts its over-60 balance to $10,000 while total receivables stay at $80,000, the share falls to ($10,000 / $80,000) x 100 = 12.5%. Tracking this percentage each month shows whether collections are improving, even when sales are rising. Most finance teams show this share on the first page of the report, so the trend is visible at a glance.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenGardens, a landscaping business, had a mounting accounts receivable problem. By running an ageing analysis, the owner learned that $20,000 of its $80,000 total receivables was more than 60 days overdue, which equals 25% of the book. Sales were healthy, but the bank balance kept falling because cash was tied up in unpaid invoices.
The team introduced a policy of sending reminders at 30 days and offering a 2% discount for early payment. It also began calling any client who reached 45 days overdue, rather than waiting for the 60-day mark. Every balance over 60 days was reviewed by hand each week. Within three months, the balance over 60 days dropped to $10,000, which cut the share from 25% to 12.5% of total receivables.
The improvement freed up enough cash for GreenGardens to buy a new mower and trailer without a bank overdraft, which increased its service capacity. The owner now reviews the ageing analysis every month and reports the overdue share to the management team as a key performance indicator. This habit turned a reactive collection effort into a routine part of running the business. Because the check is quick, the owner also spots new slow payers before they reach the older buckets.
Watch out
Common mistakes
- Failing to regularly update the ageing analysis, leading to outdated data.
- Ignoring small overdue amounts which can accumulate over time.
- Not following up promptly on overdue invoices, resulting in cash flow issues.
Questions
People also ask
Why is ageing analysis important?
It helps businesses manage cash flow by identifying overdue payments and assessing customer creditworthiness.
How often should an ageing analysis be done?
It's recommended to perform it monthly to keep track of outstanding receivables effectively.
Can ageing analysis be used for accounts payable?
Yes, it can help manage payments owed by the company to suppliers, ensuring timely payments and good supplier relations.