Accounts receivable aging: test collection quality
Analyze accounts receivable aging by following overdue balances, allowances and subsequent collection together. A higher receivable balance alone cannot distinguish healthy growth from deteriorating payment behavior. Define the customer population and the point at which an amount is considered overdue.
Read terms before reading aging buckets
A balance outstanding for sixty days can be current under ninety-day terms and overdue under thirty-day terms. Check whether the table ages from invoice date or due date, whether it includes contract assets, and whether the amounts are gross or net of allowances.
IFRS 15’s revenue model focuses on performance rather than collection timing. Your receivable analysis therefore tests a different part of the business process. For credit-loss policy, read the issuer’s applicable financial-instrument disclosures; the simplified example does not calculate a required accounting provision.
Hypothetical aging movement
Assume unchanged payment terms, no acquisition or currency movement, and gross customer receivables rising from 100 to 120. All aging buckets below are measured from the contractual due date.
| Aging bucket | Prior period | Current period | Research question |
|---|---|---|---|
| Not overdue | 80 | 78 | Has the current share decreased? |
| 1–30 days overdue | 12 | 20 | Temporary payment timing or migration? |
| More than 30 days overdue | 8 | 22 | Which customers and disputes explain it? |
| Total | 100 | 120 | Does growth explain the changed distribution? |
The more-than-thirty-day share rises from 8% to about 18.3%. That change deserves investigation, but it does not prove a specific loss amount. The balances may relate to a few disputed invoices that later settle, or to broader deterioration. Seek customer concentration, explanations and later cash evidence.
Reconcile aging with the allowance
Record opening allowance, expense or reversal, write-offs, recoveries, acquisitions and closing allowance where disclosed. A falling allowance ratio alongside worsening aging needs an explanation, but comparing the ratios alone is not enough: customer mix and collateral can matter.
Check subsequent receipts for the same old balances when available. A general statement that “collections improved” may refer to new sales rather than the overdue cohort. Partial collection can also leave the riskiest invoices outstanding. Preserve the cohort instead of replacing it with the latest total.
A common shortcut is to calculate days sales outstanding using closing receivables and quarterly revenue without adjusting for days or seasonality. If you use DSO, disclose the formula, average-balance approximation and revenue scope. Treat it as a screening metric rather than a replacement for aging.
This approach is limited when no aging table is public. Use available credit-risk and allowance notes, explicitly mark missing detail and avoid manufacturing buckets from a single total. A rising overdue balance is a research issue; it is not by itself evidence of fraud.
A further check on the example
Trace the oldest hypothetical bucket into the next period rather than only comparing successive totals. If 10 of the 22 is collected and 8 new overdue balances enter, the next closing balance can still look large despite meaningful collection. Conversely, write-offs can reduce it without cash. An aging migration view separates receipts, new delinquency and removals. If the issuer provides only snapshots, state that you cannot reconstruct the migration instead of treating the net change as a collection rate.
FAQ
Is a higher allowance always negative?
No. It may reflect more conservative estimates, growth or a changed portfolio. Reconcile the movement and read the reason before interpreting it.
Can a company improve cash by selling receivables?
It can change cash timing. Check the terms, recourse and accounting disclosures before treating the proceeds as evidence of better customer payment behavior.