Ageing analysis is the de-facto method in Accounts Receivable analysis. Any AR reporting solution is incomplete with this analysis. From a KPI perspective it is just the Net Accounts Receivable Amount, typically excluding AR Overdue values shown along a timeline, which is typically split into 30 day increments.
Ageing analysis gives the user insight into expected cash flow in the near future as well as efficiency of customer payments. It enables the collections team to prioritize different activities in order to realize the incoming payments. In order to calculate “Age” of an Invoice, the time marker must be defined, which is considered as Day ‘0’ and Invoices have a defined “Due Date”, which is used against the reference marker to calculate the age in days (e.g. if marker is 1-May-2016 and Invoice Due Date is 12-Jun-2016, the Age is 42 days).
After calculating age of all Invoices, it is binned according to any time period ranges e.g. weekly, fortnightly, monthly etc and plotted in a graph format.
In majority of cases, ageing analysis looks only at invoices that are “current” i.e. not overdue and Invoices that are “not cleared” i.e. payment is not received.
Although ageing analysis is not a defined KPI per se, but it is a critical tool when it comes to Accounts Receivable analysis. There are several variations of Ageing analysis that builds on the basic foundation discussed in this article.