Generally speaking, collection and recovery start from the same place. Most businesses extend credit to their customers. Of course, lending institutions are in the business of making loans, but other types of businesses, from manufacturers to retailers, also extend credit to their customers.
Extending credit builds goodwill and trust, and it expands the potential customer pool by increasing the range of payment options.
In an ideal world, all customers will pay in full and on time, but in reality, this does not happen. At some point, bills go unpaid. Businesses have a process for managing unpaid bills. Initially, transactions that are made on credit, meaning full payment is not made right away, are recorded as accounts receivable (AR).
Recording a transaction as an account receivable does not mean it is past due. It merely means that credit was extended to the customer in some form, and payment is expected in the future, most likely in installments and in a few months. Accounts receivable are typically collected in two months or less.
Businesses have systems and process to manage AR to encourage payments on time and in full. Accounting automation software, proper invoicing, and good credit policies, for example, are all designed to minimize bad debt, or past due payments.
Beyond these steps, which lay the foundation for good AR collections, the business will also want to evaluate its AR by creating what is known as an aging report. An aging report will provide the business with a snapshot of the status of all its accounts receivable.
The aging report organizes individual accounts receivable into groups depending on how much they are past due. The typical groupings are:
0-30 days
31-60 days
61-90 days
More than 90 days
The status of each group reflects the time that has elapsed since an invoice was issued to the customer. The aging report will help the business organize and evaluate the status of its accounts receivable.
