Accounts receivable metrics: aging buckets, days sales outstanding and roll rate

The aged debtors report is the only receivables document most small businesses ever produce, and it is usually read as a to-do list. Read as a measurement it says considerably more, but only if you know how the buckets are built and what each one is counting.

This page starts with the buckets, because every other measure here is derived from them, and then works through the handful of calculations worth taking. Every figure is invented so the arithmetic can be followed, and none of them is a target.

What to take away

How the buckets are built

Every open invoice is assigned an age, and invoices are grouped into ranges. The universal convention is monthly ranges: current, 1 to 30 days, 31 to 60, 61 to 90, over 90.

The decision that matters is what the age is measured from.

Both are correct. They answer different questions: aging by invoice date measures how long your money has been out, and aging by due date measures how late customers are. Aging by due date is the more useful for chasing, and it is the only one that means anything when different customers have different terms.

Pick one, write down which, and never compare a report of one kind with a report of the other. If your customers all have the same terms the two are a fixed distance apart and it matters less; the moment one customer gets 60 days, it matters a lot.

Reading the shape of a report

An invented aged report, by due date:

Three readings. The shape should decline steeply, and here it does.

Look at the over 90 column first. Not because 1,400 is large, but because anything that survived three months rarely arrives without an argument.

Concentration matters more than the total. If 1,200 of that 1,400 is one customer, this is one problem, not five.

Always read the report beside the number of customers in each bucket. Value alone cannot tell a systemic collection problem from a single dispute.

Days sales outstanding, and its distortion

The common calculation: receivables divided by sales for a period, times the number of days in that period.

Receivables of 70,000, sales for the quarter of 210,000, over 90 days. That gives 70,000 divided by 210,000, times 90, which is 30 days.

Now the distortion. A strong final month concentrates the quarter's sales at the end. Receivables stay high because recent sales have not fallen due, so the calculation shows slower collection when nothing changed.

Run it in a quarter with a weak final month and it reports an improvement that is equally imaginary.

Two ways make it honest: compute over twelve months rather than three to smooth the effect, or use countback.

Countback subtracts each month's sales from the receivables balance, most recent first, until the balance is gone. It counts the days that took, and it takes more work, but the sales pattern does not distort it.

It belongs with the other revenue recording metrics that measure coverage and timing from delivery to invoice.

Either way, read it as your own trend. Comparing it with another business compares payment terms and customer mix as much as collection.

Roll rate

Take a bucket at one month end and ask how much of it was collected by the next month end and how much simply moved to the next bucket.

Say 17,500 sat in the 1 to 30 bucket. A month later, 13,000 of it has been collected and 4,500 has moved into 31 to 60. The roll rate is 4,500 divided by 17,500, or 26%.

This measure tells you something before it becomes a problem. A balance that rolls from one bucket to the next is not responding to what you are doing, and roll rates rise well before a bad debt appears.

Track the 1 to 30 and 31 to 60 buckets and read them as a line over months.

What you may do about a balance that keeps rolling is partly a legal question rather than a bookkeeping one. The federal guidance for businesses on credit and finance is the place to start on it. The escalation this feeds into is set out in the accounts receivable overview.

Two more worth taking

Disputed value, and its age. Everything flagged as in dispute, with how long it has been flagged. A dispute nobody owns ages exactly like a debt and cannot be chased, so it disappears from attention while remaining uncollectable.

Unallocated cash. Money received and not matched to any invoice. It makes the aged report wrong in both directions at once: an invoice shows as unpaid while a credit sits at the bottom of the customer's account. It should be nil at every month end, and the mechanics of getting there are in the revenue recording guide and the allocation discipline that goes with it.

The check before trusting any of it

The customer ledger totalled must equal the receivables figure on the balance sheet. If it does not, something reached one and not the other, and every measure above is being computed on a partial list.

An aged report is complete only when the invoicing is complete. Work delivered but not yet invoiced appears nowhere on it. The closing routine in the bookkeeping foundations guide asks the question explicitly.

Whether unbilled work belongs in the period follows from the accounting method under which the books are kept, described in the federal guide to accounting periods and methods.

Common questions