Aged Debtors Report: a Worked Example

Debtor days compresses a ledger into one number. Two businesses can both report 47 days when one has every customer paying at 47 and the other has most paying at 30 and a few not paying at all. A lender cares about the second business in a way the ratio cannot show, because what is advanced against a ledger is recovered from the customers who actually pay.

The report also serves a second purpose. It is a test of management. A credit controller who can say why each large old balance is old, and what is happening about it, is giving the lender information. A business that has to go and find out is giving it a different kind of information.

The first thing to establish is what the bands measure. Some systems age from the invoice date and others from the due date, and on 60-day terms those are very different reports: a 31-to-60 column may hold nothing but invoices that are not yet due. Good practice keeps amounts not yet due in their own column. Unallocated credits and cash need separating too, because a credit note parked in an old band makes that band look better than it is. Unapplied cash and credit notes issued to clear disputed sums are the usual culprits. Invoices that have been cancelled and raised again restart the clock, which is why a current band much larger than recent sales deserves a question.

Read it across time and down the customer list. One report says where the ledger is; three or more show the direction. Sorting by customer shows whether the old money is spread out, which suggests a collections issue, or concentrated, which suggests one customer's trouble or one dispute.

A distributor of commercial catering equipment, constructed for this page like every figure in it, gives its bank these two reports, aged from the due date, in US$ millions. Sales over the preceding twelve months rose from US$60m to US$66m. Its invoice finance facility excludes debts more than 60 days past due, and a customer's whole balance if more than 25% of it is that old. It advances 80% of what remains. Those tests and levels are the example's, not a market norm.

Sales rose 10%. Debtor days moved by 1.4. Past-due balances rose by half and those over 60 days more than doubled. The restaurant group owes US$0.65m, of which US$0.30m is over 60 days past due, or 46%, so the remaining US$0.35m falls out under the cross-ageing test. Between them those deductions, US$1.20m at 80%, take US$0.96m off what the ledger appears to support, at a business that thinks its debtors are in line with its sales. Hospitality customers often pay slowly, and one group's trouble could be nothing more than that. The report does not say. It tells the lender which question to ask.

Debtor days gives the speed of the whole ledger; the ageing gives its shape. They belong together, and a gap between them is informative in itself. Debtor verification then tests whether the balances are real, which the report cannot do, since the report is prepared by the party being read.

The credit-loss provision is the accounts' own reading of the same data. Companies applying IFRS 9 or its New Zealand or Australian equivalent measure trade receivables at lifetime expected credit losses, often with a matrix applying loss rates to each ageing band. Most UK mid-market groups report under FRS 102, whose own model impairs debtors only on objective evidence of loss, unless the company has chosen to apply the recognition and measurement rules of IFRS 9 instead. A lender can compare the provision with the oldest bands either way. A provision that stayed flat while the old balances doubled is a question for the auditors as well as the finance director.

DEFINED IN ONE PARAGRAPH → · INVOICE FINANCE, THE PRODUCT FILE → · CROSS-AGEING →

In a working-capital request the report turns a general statement into a specific one. Asking for more because debtors have grown is a reasonable story until the ageing shows that the growth is old money, and a line that funds slower customers is a different loan from one that funds more sales. The eligible receivables calculation depends on the report directly, and the report's date needs to match the borrowing base it supports.

It is also where a lender often first sees a problem. An overdue balance from one large customer, a run of credit notes in the same name, or a sudden clean-up of the oldest band just before a review are all things to ask about. In a retention-heavy trade, old balances can be perfectly proper, since the retention is not due until the job is signed off, and a good report shows them separately.