In business, the income or sales cycle is critical to your company’s survival. It brings in the money to move the company forward. Simple. Well, yes.
The customer or debtor can pay you at a later time (up to 60 days) depending on your terms. This has all been captured in your accounting system already. The resulting report is called a “customer or debtors age analysis”. A simple report that shows how much individual clients owe you and how when the payment is due.
The report is broken into individual clients and separated int columns of time outstanding. The typical columns are:
- 30 days
- 60 days
- 90 days
- 120+ days
These dates are based on your terms or on the invoice payment date.
You sell an R100 item to Bob with terms of 7 days to pay. That would fall into “current” – it is not overdue yet. Bob forgets to pay you for 2 months so he is now outstanding 60 days. He then very sheepishly pays you. His money outstanding is now zero and falls away.
Bob does not pay you and in fact, refuses to pay you the R100. This will land up in the 120+ days column on the age analysis. Despite numerous phone calls, messages and emails, there is no luck in getting hold of him or collecting that money.
After about 6 to 8 months, or at the year end, this R100 can be written off as bad debt. Bad debt is an amount of money that is not going to be collected. It is an adjusting journal entry made by an accountant. This adjustment can only be made once a secure paper trail can be proven regarding the efforts in collecting the monies. A register or record of all bad debts written off should be kept.
Although some reports in your accounting system may look scary or you think that they do not apply to you, the customer or debtors age analysis is certainly not one of them to be feared.
It can be a useful tool in the collection of vital cash. This cash keeps your business afloat. This should never be overlooked for that exact reason.
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