Reading an aged debtors report like an auditor

An aged debtors report lists every customer who owes your client money, and splits each balance by how long it has been outstanding. It is the single most useful page a financier gets, because the funded ledger is built on it. It is also easy to read badly.

Start with the bands, then look at what moves

The columns are usually current, one month, two months and three months or more. A healthy ledger is heavy on the left. But the shape on its own says little.

Put this month’s report beside last month’s and follow each customer across. A balance in “one month” should have been in “current” last time, and should be paid or in “two months” next time. When the same customer’s figure slides right month after month while new invoices keep landing in current, the customer is paying the new and leaving the old. That is usually a dispute nobody has told you about.

Customer	Current	1 month	2 months	3 months+	Balance
Brennan Building Supplies	42,300	18,150	–	–	60,450
Castlegate Developments	21,600	7,400	9,200	–	38,200
Moorfield Joinery	18,950	–	–	–	18,950
Northgate Construction	–	3,600	3,600	12,600	19,800
Penrose Homes	14,000	2,270	–	–	16,270
Total by band	96,850	31,420	12,800	12,600	153,670
Less unallocated cash (Moorfield)					(4,940)
Report total					148,730
Sales ledger control account					151,230

Harlow Fixings Ltd, aged debtors at month end, in pounds. An illustrative report for a fictional client.

In the example, Castlegate has paid its newer invoices but £9,200 sits in “two months”. Northgate is worse. Something has been unpaid for three months or more, and the £3,600 in each of the two younger columns says a regular invoice is going unpaid too. Both are calls to make before the next funding request, not after.

Invoice date or due date?

Before reading any column, find out what the report is ageing from. Aged by invoice date, a customer on 60-day terms will always show a balance in “one month”, and nothing is wrong. Aged by due date, the same balance is current, and anything in “one month” is genuinely late.

Neither is better, but the two read very differently. A client can switch between them from one month to the next without anyone noticing. The setting is usually printed in the report’s header or footer. If it isn’t, ask, and ask for it to stay the same every month so that this month can be compared with the last.

The same goes for the date the report was run. A report printed on the third of the month, with the first two days’ receipts already posted, looks better than one run at the close of the last working day.

Credit balances and unallocated cash

Money a customer has paid that hasn’t been matched to an invoice shows as a credit. It often has its own “unallocated” column, or appears as a minus figure in current. Read it as a positive amount taken off the total, and ask two questions:

• Which invoices was it meant to pay?
• Has it reached the account it should have?

If Moorfield’s £4,940 paid invoices you have already funded, those invoices are still on the ledger as if unpaid. The ledger then overstates what you can collect by exactly that much.

An old balance on a report is a question. An old balance that moves one column right every month is an answer.

Credit notes

A credit note reduces a debt the customer will never pay. Look at when they are raised and against what. Credit notes clustered just after month end, raised against invoices you funded weeks earlier, are dilution you were not told about.

A ledger with almost no credit notes, in a trade where returns are normal, is just as worth asking about. Credit notes can be held back to keep the funded balance up.

A total that doesn’t agree

The report total should agree to the sales ledger control account in the client’s accounts. It should also be close to the debtors figure in the management accounts for the same date. In the example it is £2,500 short.

The usual causes are innocent: a report run on a different date, a journal posted after it was printed, a customer filtered out. But a customer left off the report is also how a contra or a disputed account goes unseen. The difference has to be explained, not rounded away.

Sage’s “Period 1” means a month

Sage 50 can head its ageing columns “Current, Period 1, Period 2, Period 3, Older”. Each period is a month, so Period 1 is a month old and Period 3 is three months old. Read as days, the whole ledger looks as if it was invoiced last week.

Because every customer’s columns still add up to its balance, nothing on the page tells you it has been misread. Check the heading against the report’s own settings, and against an invoice whose date you know.

What to ask the client

1. Why each balance over three months is still open, and whether the customer disputes it.
2. Which invoices each unallocated receipt was meant to pay, and which account it was paid into.
3. Every credit note raised since the last report, with the invoice it reduces.
4. How the report total agrees to the sales ledger control account, with the reconciling items.
5. The report’s ageing settings: by invoice date or due date, and in days or months.

None of these takes long to answer for a client whose ledger is in order. The ones that take long are the answers you were looking for.