Securing cash flow is a matter of survival for any business. It means having the visibility you need to make the right decisions about when to actually pay supplier invoices, renegotiate contracts or seek external financing. One of the key indicators used by those in charge of receivables management and debt collection is the Aging balance or Aged Trial Balance, which details the amounts due and when they fall due. It provides a clear picture of future cash flow. We explain everything you need to know about its definition, method of calculation and implications!
What are ageing scales and what are they used for?
The aged trial balance is an accounting document that correlates trade payables and receivables, due and payable over a given period, and grouped by late payment stage. In this way, it is possible to identify very quickly which third-party accounts present a risk of difficulty, which could ultimately lead to non-payment. On the other hand, you can anticipate which payments should be made to suppliers as a matter of priority.
So there are :
- An aging balance for customers, showing late payments, classified by frequency, and serving as a basis for the reminder policy
- an aging balance, which lists the debts owed to the various suppliers, classifying them according to age. This is important for cash flow management, and will help to identify any suspension of payments.
The term "aged" balance is used because it staggers payment due dates over time: less than 30 days late, more than 30 days late, more than 60 days late, and so on.
For debt collection, the grouping of late payments by importance, potentially correlated with the importance of the invoice concerned, enables the actions to be defined. This could involve automatic reminders for example, if the accounting data is integrated with a credit risk monitoring tool. At the same time, the global view offers the possibility of delaying certain supplier payments, in order to avoid any potential payment incidents.
Organise your scales to :
- Monitor your cash flow and anticipate working capital requirements;
- Manage receivables and payables by age, to identify late payments and prioritise reminders
- Evaluate the performance and measure the effectiveness of your debt collection and management.
How do you draw up your ageing scale?
The aging balance shows the cash position, receivables to be collected and invoices to be paid as at the balance sheet date. It is essential at the time of closing the accounts, but it may be useful to publish it every month or quarter, for better monitoring of trade receivables in particular.
The dashboard is an indicator that is both simple to set up and operational for any finance manager wishing to manage their company's cash flow strategy. All purchase invoices, sales invoices and bank statements should be entered, and it should be ensured that each transaction is correctly recorded and reconciled. When entering accounting documents, you need to specify the date on which each invoice must be paid.
For the information compiled to be accurate, it goes without saying that the accounting entries must be finalised, the accounts revised and the customer and supplier accounts lettered. It is also important to check that the accounting system used is updated in real time, to avoid having to follow up a customer who has already paid their invoice.
Careful recording of due dates is essential, otherwise the aging balance will become distorted and useless.
How can you make the most of your elderly scales?
The value of the ageing balance lies in using the data that emerges from it. Once the data has been compiled, a number of actions can be taken:
- Analyse it periodically (weekly, monthly) to monitor changes in receivables and payables;
- Prioritise reminders by using the aging balance to identify at-risk receivables and prioritise collection actions;
- Plan cash flow by integrating cash balance information into cash flow forecasts, for proactive management.
General and aged scales: what's the difference?
The aging balance lists all the company's accounts, from class 1 to class 7 of the chart of accounts, and mentions all the credit and debit movements for the period under review, as well as a final balance. The overall view provided is essential to the balance sheet, but does not take account of potential changes. The aging balance focuses on third-party accounts, providing specific details of receivables and payables, making it a more targeted tool for cash management.
It is this consideration of different timeframes that makes the aging balance so valuable, in particular by providing an evolving monitoring of the company's financial situation. It makes it possible to anticipate the measures to be taken in the various scenarios presented (receivables unpaid for more than 60 days, for example) and to measure the potential overall worsening of customer payment times.
A tool for assessing collection performance
In practice, the aging balance is widely used by credit managers and financial directors to measure changes in the level of unpaid debts over time, as well as their duration. The aim? To validate the effectiveness of the collection policy put in place.
Now more than ever, the time taken to collect debts is crucial to a company's survival, in a difficult economic climate where payment times and delays are getting longer
Although it is not compulsory to draw up an aging balance, it does enable you to manage your company's financial strategy more effectively, particularly the essential credit insurance, and to measure changes in cash flow risks.
Contact our teams to assess your needs and discover our trade credit insurance and debt collection solutions, tailored to your industry and geographical area.