7.3.2 Collection period
While most trade credit is granted for a period of 30 days from the invoice date or statement date, not all debtors pay at the end of the 30-day period. Some will pay earlier but many pay late. Credit managers will keep a close watch on the average collection period , which is the average time taken to collect accounts receivable. The longer the period the longer the firm must finance its investment in debtors. (You know how to calculate this).
Another method used to control the collection period is to have outstanding accounts receivable analysed in age categories, a process called ageing . Here the total amount of accounts receivable is classified according to the period that particular amounts have been outstanding.
For example:
Two firms may each have $150,000 in outstanding accounts receivable. Assume that an age analysis shows the following:
|
Firm A |
Firm B |
0 - 30 days outstanding |
80,000 |
60,000 |
30 - 60 days outstanding |
40'000 |
60,000 |
60 - 90 days outstanding |
20'000 |
30,000 |
120+ days outstanding |
10,000 |
Nil |
|
$150,000 |
$150,000 |
While firm A appears to have debt outstanding for a longer time, Firm B appears to have a greater proportion outstanding more than 30 days. The ageing process is useful for keeping credit managers informed on potential bad payers or possible bad debts
Previous Page