USA How do you come up with an estimated % of uncollectible for aging buckets?

[FooserX]

Hello,

I cannot for the life of me find this online anywhere.

I am looking for directions on how to find the historical % of uncollectible AR for a company, to apply to the aging buckets to calculate AR reserves.

Everywhere I look shows the % of receivables method, but every tutorial just says "use historical rates to determine the percent"

How does one find this in a company? In a huge company, what data do I need to be looking at to get the amount that is uncollected? Is this something on the GL accounts/balance sheet?

Does this make sense? How does one go about estimating that %....?

Thank you in advance
Scott

 

[kirby]

Sending you private message. Log in to forum and click on envelope icon at top.

 

[FooserX]

Sending you private message. Log in to forum and click on envelope icon at top.

This was great!! Thank you

 

[FooserX]

Ok, so I looked at that, and THOUGHT it was super easy, but when looking at our receivables, I don't get it at all.

The example, and this video:

Use a simple outstanding receivables at a certain period. At the end of 4 periods, there is a remaining balance. This residual is then divided by the aging buckets balances:

Example
Beginning Balance 0-30 31-60 61-90 91+
10,000 8000 4500 1500 300 (remaining and written off)
300 300 300 300 (divide the remaining $300 by ending balances of each bucket)
------ ------- -------- ---------
3% 3.75% 6.67% 20% (Gets us the uncollectible factors)

In the real world, this would be one month. What do we do with the other 11 months? Do we run this calculation process for each month? So we have 12 sets of uncollectible factors? And then we what? Average them?

So then each month going forward, we use those credit balances on the aging buckets for the month?

Thoughts?

TIA

 

[kirby]

https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-47a.pdf

I don’t know your industry, but here is what banks are expected to do to get a reasonable allowance for loan losses. In particular look at page 8 where they are expected to include qualitative factors in their analysis.
So to answer your question the historical rate calc is usually done quarterly. Then averaged for a full year. But the quarterly info will tell you if losses are affected by the time of year. After the number crunching, a good analysis depends on your skill in understanding your company and your industry’s trends and the economy. It’s not easy and not a "paint by the numbers" process and the results can always be criticized. But somebody has got to do it.

Good luck!