How to Read and Understand Aged Debtors and Aged Creditors Reports

Naming Conventions

Although quite simple reports to understand, the Aged Debtors and Aged Creditors can often come across quite complex due to the various names used for these reports. In the UK, the report which shows a list of customers who owe you money and how long they’ve owed you, is called the Aged Debtors report. However in the US this is referred to as Aged Receivables (A/R). Similarly, in the UK, the report which shows a list of suppliers who you owe money to and how long you’ve owed them is called the Aged Creditors report. However, in the US this is referred to as Aged Payables (A/P). Because many of the accounting tools we use are built in different countries and for multiple countries, these terms are often used interchangeably. 

‍Timing

Both ageing reports offer various date ranges that identify how old - the age - of the money owed. Depending on the format you view these in (e.g. Excel, Xero, QuickBooks, etc…) you should be able to adjust these ranges, but here is the most common format. The following terms are used on both the A/R and A/P reports.

Current - this shows a transaction where the due date hasn’t happened yet. For example, if you owe a supplier £1000 but it is due in one week, this will show on the A/R report under the ‘Current’ date.

1 - 30 days - this shows transactions where the due date has passed and the payment of the transaction is now between 1 day and 30 days overdue.

31 - 60 days - this shows transactions where the due date has passed and the payment of the transaction is now between 31 days and 60 days overdue.

61 - 90 days - this shows transactions where the due date has passed and the payment of the transaction is now between 61 days and 90 days overdue.

Other (e.g. 91+ days or 91 days and over) - This final date range is from 1 day after the last broken down date range. In our example, this would be any transaction where the due date has passed and the payment is now over 91 days overdue. 

‍What to do with this information?

So what should we do with this information now we know what the information on the report means? At this point we need to think about strategy, process and trends.

‍Strategy

If we owe people money ourselves (A/P report), we need to identify if this is because we are disputing whether we should make the payment, if we need to make that payment soon, or if we need to contact the supplier to discuss payment terms.

If we are owed money (A/R report), we need to think about how we approach recovering those funds. Here’s an example, thought process for how to deal with invoices, but your actual approach will be unique to you:

Current Invoices: These are the most recent invoices. Ideally, this column should be the largest, indicating that most customers are paying on time.

30-60 Days: Invoices in this category suggest a mild problem with a few customers. It might indicate a need for follow-up.

60-90 Days: Invoices in this category require immediate attention. It's a red flag, indicating potential issues with the customers' ability to pay.

90+ Days: Invoices that are more than 90 days old are seriously delinquent and require urgent action. These might need a more aggressive approach, such as debt collection procedures.

Obviously, it’s important to contextualise these decisions with our overall cash flow. If we are paying suppliers on average only 1 day after we receive an invoice, but customers pay us 30 days after, then this could cause a cash flow issue, so we may look to slow down our outward payments to mitigate this risk. However, maintaining a healthy relationship with key suppliers is fundamental to a businesses long term sustainability so it makes sense to prioritise certain suppliers also.

‍Process

This is where a good process helps to make consistent and effective decisions on both the customer and supplier sides. We can think about what sort of structure and processes we currently have in place and how we improve these in order to increase the chances of earlier payment. 

It is often the case when first reviewing this area that there is a two pronged response required; one to chase the outstanding debtors (customers who owe you) and another to identify a process that prevents or reduces the likelihood of new debtors becoming overdue. This may involve a series of automated emails, calls, letters and at some point legal support.

It is also possible to add interest to an invoice at 8% plus Bank of England base rate. You can find more information about this on HMRC’s website.

In the UK, software like Chaser.io or Satago can be used to help automate and manage these ‘credit control’ processes but the process issues may happen sooner during the invoicing process. Maybe the sales team isn't setting appropriate expectations, or there are errors on the billing that cause delayed payments.

We can track ‘debtor days’ and ‘creditor days’ as metrics to see how we’re doing in these areas and to allow us to make decisions about how we balance the two and don’t spend out before we receive. This could be reviewed twice a month and relevant payments made to suppliers at those two points. This is both efficient and allows a business leader to make decisions based on a larger amount of data and not just paying a single supplier invoice as an exclusive task. Obviously, many suppliers may be on direct debit or standing order and this process in itself might create efficiencies when paying suppliers, but if you pay your suppliers on direct debit, you should also make sure your customers are on direct debit too. If your customers only ever pay via bacs or bank transfer then you may want to consider managing supplier payments in the same way to give you the cash flow flexibility to decide the timing of payments.

‍Trends

Even with a robust and consistent process in place we may need to continue to evolve our approach through analysing specific trends. For example, if we spot that a certain customer continues to pay late, we may choose to reduce their payment terms (say from 30 days to 14), or we may choose to ask them for payment up front next time.

Another possible trend could be that you notice a specific service or product always has late payments, e.g. a service based business that has both a subscription model and a project based model could find that their projects always have issues with paying on time. This could be mitigated somewhat by asking for a bigger deposit up front, or have a direct debit in place for those customers so payment can be taken on project completion.

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