An ageing balance sheet is widely used method of summarizing data about debtors. It consists of information about the debts and the time decay with which they have been paid or will be paid. This type of data is usually collected by and analyzed by credit management team so that they can analyze, predict and make calculation pertaining to your credits and debts.
A credit manager will take into account all of such details of your clients and merge them to make a detailed report on outstanding balances owed by your clients and customers over a specific period of time. Generally these reports are aided by graphs to help better understand the statistics.
The most precise and detailed ageing balance sheets consist of both qualitative and quantitative data about customer invoices. The graph is based on the probability of recovery of amount. This data is a very important for your financial heads as it would let you know about possible losses due to delay in payments as the probability of receiving your payments gradually decrease with time.
The graph can be plotted against different pieces of information and analysis may differ from situation to situation. Generally columns contain days or dates in increasing order defining the criticality of receivables. The initial columns refer to receivables which are in safe area, but as the receivables move on to later columns the profitability and probability of receiving your due amount decreases.
Data can be monitored for individual accounts as well as for aggregated accounts to determine overall profitability.
The ageing balance sheet helps in taking adequate measures to acquire your receivables and tackle your debtors accordingly. For instance if the outstanding amount to be received is only gone up 20-30 days you make send reminders or calls to your debtor. However, for accounts which have gone well above 120 days or so, a legal action maybe required from your credit management team.
To sum up, an ageing balance sheet helps your credit manager to prevent bad debts and maintain overall profitability of your organization.