Page 499 - Business Principles and Management

Unit 5

accounts receivable are gradually growing larger each month, then the company
is not collecting payments from customers quickly enough. Soon, the company
may not have enough cash to pay its own bills. Before accounts receivable get
too large, the company must take action to collect accounts more efficiently.
The total accounts receivable may not show the true picture. For instance,
an analysis may show that most of the overdue accounts are only 30 or 60
days overdue, with only a few 90 days or more overdue. In this situation, the
problem lies with just a few customers. The company can take aggressive ac-
tion toward those customers and may not have to change overall collection
policies. On the other hand, if an analysis of the accounts receivable record
shows that most of the late accounts are 90 days or more overdue, the collec-
tion problem is more pervasive. In this case, the company may have to take
stronger action to determine the reason so many customers are not paying
their accounts.
One common method of studying accounts receivable is referred to as aging
of accounts, a process in which customers’ account balances are analyzed in
categories based on the number of days each customer’s balance has remained
unpaid. The form in Figure 18-4 is an example of aging of accounts.
In the example, the amounts owed by the Adams-Jones Company and the
Artwell Company are not overdue. However, Brown and Brown owes $82.23,
which has been due for more than 60 days but less than 90 days; $120, which
has been due for more than 30 days but less than 60 days; and $157.50, which
has been due less than 30 days. The $228.18 owed by Custer Stores has been
due more than 60 days but less than 90 days. And the amount due from A.
Davis, Inc., has been due more than 90 days. The form enables the manager to
see clearly the status of all accounts receivable and to plan any necessary correc-
tive action.
Another method of measuring the efficiency of collections is to compute the
percentage of delinquent accounts in relation to the total outstanding accounts.
For example, if 10 percent of the accounts in January are delinquent, 15 percent
are delinquent in February, and 20 percent are delinquent in March, this indi-
cates an unfavorable trend. One recent study revealed that if accounts are not
paid within 3 months, the chance of collecting is 73 percent; after 12 months, it
is less than 30 percent.

FIGURE 18-4 The status of each account is apparent through aging of accounts.

ANALYSIS OF ACCOUNTS RECEIVABLE
January 2, 20--
DATE
NAME AND ADDRESS 1 TO 30 DAYS 31 TO 60 DAYS 61 TO 90 DAYS OVER 90 DAYS TOTAL EXPLANATION
Adams-Jones Company
Cincinnati, Ohio... $705.00 $705.00
Artwell Company,
Chicago, Illinois.. $1279.53 $1279.53
They wrote “will
Brown and Brown, clear up account
Gary, Indiana...... $157.50 $120.00 $82.23 $359.73 this month.”
A. Davis, Inc. Account in hands
Detroit, Michigan.. $525.00 $525.00 of attorney.
Custer Stores,
Granville, Ohio.... $228.18 $228.18 Now on COD basis.

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