Know the Figures

AR Aging & Bad Debt Provision

How much of what you are owed you will actually collect.

Replaces: Credit-control consultants and paid receivables modules

How to use it

Split what you are owed by how overdue it is, then apply an expected loss rate to each band. Older debt is worth less, and the provision is what that arithmetic says you should stop counting as an asset.

Where the number comes from

  • Each ageing band is multiplied by its own expected loss rate, and the results are added together.
  • The effective provision rate is the total provision over the total ledger — a single number summarising the ledger's quality.
  • Net receivables is what remains: the figure a careful reader of your balance sheet would use.
  • Days sales outstanding converts the ledger into days of revenue, so you can compare it against your payment terms.
  • The loss rates default to a common shape — small for current debt, rising steeply past sixty days — but they should be replaced with your own history.

What goes wrong

The part most calculators leave out.

  • The default loss rates are illustrative. The only defensible rates are the ones derived from your own collection history over several years, which is exactly what accounting standards expect you to use.
  • Ageing bands hide concentration. A ledger where one customer owes the entire over-90 balance is a completely different risk from one where fifty customers each owe a little, and the provision is identical.
  • Debt ages from the invoice date, not the dispute date. An invoice held up by a delivery query looks like a payment problem and is not one.
  • Expected credit loss models under IFRS 9 and ASC 326 are forward-looking and require consideration of future conditions, not just historical ageing. A simple ageing matrix is a starting point for that, not a substitute.
  • Provisions are estimates that auditors examine closely. Rates that move conveniently between periods attract exactly the attention they deserve.

The receivable that was never an asset

A ledger shows 1,055,000 owed, which the balance sheet reports as a current asset. Split by age, 640,000 is not yet due and 62,000 is over ninety days old. Applying loss rates that rise from 0.5% to 50%, the provision comes to about 55,000 — and 31,000 of that sits in the over-90 band alone, which is under 6% of the ledger. Roughly 5% of everything owed is not coming. Businesses that discover this at year-end rather than monthly are the ones that find a hole in the accounts they cannot explain.

Questions

What loss rates should I use?
Your own. Take several years of invoices, group them by how overdue they became, and measure what proportion was ultimately written off in each band. That history is the only rate an auditor will accept without argument.
What is the difference between a provision and a write-off?
A provision is an estimate that some of the ledger will not be collected, made while you are still trying. A write-off removes a specific invoice you have given up on. Provisions are made in advance and adjusted; write-offs are final.
Why does debt over 90 days matter so much?
Because collection probability falls sharply with age, and past ninety days the reason is usually a dispute or an inability to pay rather than administrative delay. Both take far more effort to resolve than a reminder.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.

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