Accounts receivable typically represent the largest asset on most companies’ balance sheets. Many credit and collection departments prioritize collection efforts based on the age or length of time an invoice has been outstanding.
According to Mike Iverson, the Financial Operations Networks' chief financial officer, a common practice is to segment an AR portfolio into "aging buckets" that are:
- One to 30 days past due
- 31 to 60 days past due
- 61 to 90 days past due
- More than 90 days past due
ARO2C has developed several tools to assist you with this analysis. For example, you can use the Accounts Receivable Aging Report to track your customers' payment history. It also assists with analyzing the risk that your customers will not pay.
The percentages of your AR that should be in each bucket are industry dependent, Iverson says. “There is not necessarily a best practice,” he says. For instance, in the medical field, some organizations include additional age buckets because it may require 60 to 75 days before payment is received due to the paperwork that must be filed. Conversely, a service business that has a majority of its sales as credit card payments should have minimal past due amounts.
John Salek, VP Business Services, Genpact, and TARN Advisory Board member, advises segmenting AR portfolios by size, composition and complexity. Criteria could include number of accounts, number and value of open line items and concentration of receivables. In many companies, the Pareto principle, or 80/20 rule, applies. It occurs when a small percentage of customers, perhaps 20 percent, represent a majority, some 80 percent, of your business.
Salek suggests creating a collection intensity matrix to develop an appropriate collection strategy for each segment. In an example provided in his book, Accounts Receivable Management Best Practices, a company has 1,688 accounts, and 191 are responsible for 67 percent of the AR portfolio. Some 492 customers represent 28 percent of AR; 826 accounts provide only 5 percent of the total.
Salek says to develop a tailored approach to each segment. Call frequently the 191 accounts that represent the largest portion of AR and hold periodic meetings with them. They should receive the most attention, perhaps as much as half of a collector's time. The collector should focus about 25 percent of their time on the 492 customers who represent 28 percent of AR.