Aging analysis | Definition and overview

Aging analysis in bookkeeping is a method used to evaluate a company's accounts receivable (AR) by categorising outstanding customer invoices and credit memos based on their age, typically in 30-day intervals.

This process provides a comprehensive view of a company's bad debt and overall financial health.The main purpose of aging analysis is to:

1. Assess the effectiveness of credit and collections functions
2. Estimate potential bad debts to guide management in adjusting allowances for doubtful accounts
3. Predict cash flow trends by analysing historical patterns in unpaid invoices
4. Detect potential fraudulent activities through unusual patterns in aging reports

How aging analysis helps businesses?

• Spotting troublemakers: It helps identify customers who are consistently late with their payments. This allows the business to make informed decisions about whether to continue doing business with them or adjust their credit terms.
• Predicting cash flow: By seeing how many old bills are piling up, a business can get a better idea of how much money they might actually collect in the near future. This helps with planning and budgeting.
• Chasing payments smarter: Instead of sending the same reminder to everyone, businesses can tailor their collection efforts. A gentle nudge might work for a slightly overdue bill, while a firmer approach might be needed for an ancient one.
• Planning for losses: Sadly, some bills might never get paid. Aging analysis helps estimate how much money might be lost to bad debts, which is important for financial planning.

To sum up, aging analysis is like a health check for a business' unpaid bills. It helps identify potential problems, make smarter decisions about customers and cash flow, and ultimately keep the business financially healthy.

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