Reading a receivables aging report before you extend more credit

The buckets

An aging report groups what you are owed by how long it has been owed, counted from the invoice date or the due date — decide which, and be consistent, because the two produce quite different pictures.

What each bucket is telling you

• Current is normal trading. It should be the largest bucket; if it is not, you have a collections problem rather than a credit-terms problem.
• 1–30 days is mostly administrative — an invoice mislaid, a payment run missed. Usually recoverable with a reminder.
• 31–60 days is where intent shows. A customer at this age is choosing which suppliers to pay, and you are not at the top of the list.
• 61–90 days is a problem to resolve rather than chase. Something has changed at the customer, and the balance is unlikely to clear without a conversation about terms.
• Over 90 days should be treated as doubtful until proven otherwise, and provided for accordingly. Continuing to carry it at full value flatters the accounts.

The shape matters more than the total. Two customers can owe 200,000 birr each, one entirely current and one with half of it past 60 days, and they are not remotely the same risk.

Aging is a financing report

Here is the reframe that makes it useful to an owner. That 200,000 birr is money you have already spent — you bought the goods, paid the freight and the duty, paid the staff who sold it — and have not yet received.

It is working capital, funded at the same cost as the stock on your shelves. At a 16% cost of capital, carrying 200,000 birr of receivables for a year costs 32,000 birr. The 60,000 birr sitting past 60 days in the table above is costing roughly 800 birr a month to finance, on top of the risk that some of it never arrives.

Setting a limit from the profile

A credit limit set once when the customer was onboarded and never revisited is a number from a different business. Two things should move it:

1. The aging profile. A customer whose balance is consistently current can carry a higher limit than one of the same size whose balance sits in the 31–60 bucket every month.
2. The trend. A profile drifting older month over month is the signal, and it appears well before a default. A limit that responds to the trend prevents the exposure; a limit that responds to a missed payment merely records it.

The mechanical part — refusing a sale that would breach the limit, at the counter, before the goods leave — is where most credit policies fail. Not because the policy is wrong, but because the person at the till has no way to know, and no good way to say no.

The conversation to have

When a balance ages, the instinct is to ask for payment. Often the more productive question is what changed — a customer stretching everyone equally has a cash problem, while one stretching only you has a dispute you do not know about. An aging report tells you which of those you are looking at, if you read it per customer rather than in total.