Ageing of receivables is the practice of classifying a company's trade receivables from customers according to whether they are past due and, if so, how many days they have remained uncollected. The aim is not merely to see the total size of receivables, but to show how much is not yet due, how much is overdue, and how much carries collection risk.
For example, if a company's balance sheet shows 10 million TL in trade receivables, that figure alone is not enough. If 9 million TL is not yet due, the position is relatively healthy; if 5 million TL is more than 90 days overdue, the situation is quite risky.
Numerical example
Assume ABC Inc. had total trade receivables of 6,000,000 TL from its customers as of 31 December.
| Customer | Receivable Amount | Due Status | Days Overdue |
|---|---|---|---|
| Customer A | 1,500,000 TL | Not yet due | 0 days |
| Customer B | 1,200,000 TL | Past due | 15 days |
| Customer C | 900,000 TL | Past due | 42 days |
| Customer D | 800,000 TL | Past due | 75 days |
| Customer E | 1,000,000 TL | Past due | 110 days |
| Customer F | 600,000 TL | Past due | 190 days |
| Total | 6,000,000 TL |
Receivables are grouped below by ageing bucket, starting with those not yet due:
| Ageing Bucket | Amount | Share of Total Receivables |
|---|---|---|
| Not yet due | 1,500,000 TL | 25.0% |
| 1-30 days overdue | 1,200,000 TL | 20.0% |
| 31-60 days overdue | 900,000 TL | 15.0% |
| 61-90 days overdue | 800,000 TL | 13.3% |
| 91-180 days overdue | 1,000,000 TL | 16.7% |
| Over 180 days overdue | 600,000 TL | 10.0% |
| Total | 6,000,000 TL | 100% |
According to this table, only 25% of the company's receivables are not yet due. In contrast, 75% consists of past-due receivables. This indicates that collection management needs careful review.
More importantly, when the 1,000,000 TL in the 91-180 day bucket and the 600,000 TL overdue by more than 180 days are considered together, 1,600,000 TL of receivables have remained uncollected for more than 90 days.
1,600,000 / 6,000,000 = 26.7%
So roughly one quarter of total trade receivables has been uncollected for more than three months. This ratio is an important warning indicator for the company's short-term liquidity.
The company may show sales and even profit on the income statement; but if customers are not paying, those sales have not reached the cash register. Profit and cash are not the same thing.
| Monthly Cash Outflow | Amount |
|---|---|
| Payroll | 700,000 TL |
| Supplier payments | 1,200,000 TL |
| Loan instalments | 400,000 TL |
| Total | 2,300,000 TL |
Although ABC Inc. has 6 million TL in trade receivables, if a significant portion is not collected on time, the company may struggle to meet its 2.3 million TL monthly cash outflows. In such a case, the company may need bank credit even while reporting a profit.
The CFO's view should be: "We have 6 million TL in receivables; but 1.6 million TL of that has been overdue for more than 90 days. We therefore cannot treat all receivables as a short-term usable source of cash."
If desired, the company can assign a different uncollectibility rate to each ageing bucket to produce a simple risk estimate. The rates below are illustrative only; actual rates should be set according to the company's collection history, customer quality, sector conditions, and collateral structure.
| Age Bucket | Receivable | Assumed Uncollectible Rate | Estimated Risk |
|---|---|---|---|
| Not yet due | 1,500,000 TL | 1% | 15,000 TL |
| 1-30 days | 1,200,000 TL | 2% | 24,000 TL |
| 31-60 days | 900,000 TL | 5% | 45,000 TL |
| 61-90 days | 800,000 TL | 10% | 80,000 TL |
| 91-180 days | 1,000,000 TL | 25% | 250,000 TL |
| 180+ days | 600,000 TL | 50% | 300,000 TL |
| Total | 6,000,000 TL | 714,000 TL |
In this simplified calculation, roughly 714,000 TL of the company's 6 million TL receivables appears to carry collection risk. This amount is not a definite loss; it is a management estimate used to gauge the size of the risk.
The CFO should monitor the following indicators closely:
- The ratio of receivables overdue by more than 90 days to total trade receivables
- Whether overdue receivables are rising or falling month by month
- The ageing profile of the largest customers
- Changes in average collection period
- Whether a customer's balance keeps moving into the 30, 60, 90, and 120 day columns
If the same customer's debt keeps shifting into older buckets, the company may no longer be merely selling; it may be financing its customer. This increases both collection risk and working capital needs.
Comments
Comments are held for moderation and appear here only after approval. No account is required to comment.