Reading the risk: How aging buckets inform credit decisions

The accounts receivable (AR) department is the engine that drives an organization’s cash flow, managing the money owed to the business. What constitutes a healthy or unhealthy receivables portfolio varies by company, industry and risk tolerance, and those differences directly influence how organizations assess exposure, prioritize collections efforts and determine when corrective action is needed.

Why it matters: Aging buckets, time-based categories used to group outstanding customer invoices, serve as a tool for risk mitigation. They reveal where cash flow is slowing, pressure is building or risk is emerging, allowing credit professionals to intervene before minor issues escalate into serious financial strain. 

Reviewing aging buckets is often helpful in mitigating risk when there is a concern with customer payment behavior that requires deeper analysis. “My team usually examines aging buckets when we’re asked to release a hold or during an underwriting process such as an annual review, or if a concern has arisen about a particular customer or a group of customers, perhaps in a specific industry,” said Michelle Kelly, CCE, CCRA, CICP, senior credit manager at Mansfield Energy (Gainesville, GA). “We typically review aging buckets on an individual customer basis, unless we’re analyzing a broader group of customers within an industry.” 

Depending on the company, the time frames and the way aging buckets are interpreted can vary. “We currently have aging buckets for 1-15, 16-30, 31-60, 61-90, 91-120 and 121+ days,” said Sherry Bushman, director, credit and collections at Partners Personnel (Santa Barbara, CA). “A healthy aging ranges from no past dues up to 30 days. Unhealthy aging will display short or overpays, skipped and/or disputed invoices and accounts that are extremely past due in the various aging buckets.” 

Tracking days past due can alert credit professionals which accounts are high risk and help them prioritize accounts on collection efforts. They may indicate if collection habits need improvement or that their exposure is heavily concentrated in one customer who makes up a large portion of past-due balances.  

“I view the buckets in terms of priority,” said Kelly. “The 90-plus-day bucket should already be on your radar; you should already be actively addressing it. At that point, you want to dig deeper: is the past-due amount concentrated in a specific industry or primarily with one customer? Taking a granular approach helps uncover the root cause of the 90-plus-day bucket.” 

It’s fair to note that a past-due invoice generally doesn’t mean that they don’t have the ability to pay you. “In the construction industry, I expect more delays as some projects take 45 to 65 days to complete, which naturally extends turnover time,” said Eric Schlobohm, credit manager at Inspire (Golden Valley, MN). “If we miss a specific document or waiver required for payment, it can delay payment by another five or 15 days. For international customers, we consider geopolitical risk when reviewing agings. For instance, in Western Europe, particularly in France and the U.K., businesses are impacted by huge deficits, causing customers to stretch payments to 60 days.”

Some credit professionals go as far as comparing their own agings with other companies in their industry to further assess risk. The Quarterly Metrics Survey, for example, gathers aging data from similar companies, by size, industry or region, to help determine whether changes in aging buckets are unique to the company or part of a broader industry trend signaling economic stress. 

“Comparing data trends by the location and the type of business will illustrate the industry economic strains,” said Kelly. “It’s helpful to couple the SIC code (Standard Industrial Classification) to the client profile and run an insightful report to truly view the industry trends.  Aging buckets, in conjunction with other ways in reviewing the aging, will capture the higher risk accounts quicker to mitigate the exposure.” 

The bottom line: Aging buckets are more than a retrospective accounting tool—they are an early-warning system. When reviewed consistently and in context, they help credit professionals identify emerging risk, uncover root causes behind payment delays and take proactive steps to protect cash flow before exposure becomes a problem.