When you invoice a company for services or products rendered, your customer’s payments form the basis of your business’s working capital. If invoices frequently go unpaid or are late, your business’s working capital is diminished, and your ability to access funds needed for operating expenses, payroll, and growth is hindered.

Cross aging of accounts receivable is an easy and efficient way to identify and classify accounts and clients that are frequently delinquent. By utilizing a formula that compares the dollar amount of past due invoices to the total amount of invoices due, it is easy to identify and take action to remedy past due accounts. When more than a certain percentage (generally 25{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} to 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf}) of an account balance is past due, the account can be classified as cross aged.

How to Cross Age an Account

By cross aging the accounts receivable, a business owner can quickly identify problem accounts. If more than a third of an account is over 90 days old, there is likely a problem that needs to be investigated. There might be a reasonable explanation, or it might be time to cut the customer off until the account is brought current.

While a business can use any percentage in its internal cross aging equation, Allied Financial Corporation subscribes to the 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} / 90 days equation. This means if more than 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} of the account is over 90 days old, then the account is cross aged. Let’s review the below example:

Example: 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} Cross Aging Rule for “Stay Afloat LTD”

“Stay Afloat LTD” manufactures tiny umbrellas, crazy straws, and swordfish-shaped cocktail skewers for cruise ships and sells to its clients on credit. Unfortunately, many of the cruise ships pay the invoices on “island time” – causing Stay Afloat to experience a shortage of available working capital.

The company’s owner, Captain Jack, would like to know which accounts are negatively affecting his cash flow. Using the 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} / 90 days cross-age rule, Captain Jack’s accountants created the following table:

cross age table

Dividing the 90 days overdue amount by the total due, we can see that only “Ignore the Icebergs Cruiselines” has more than 33{169eece2392127c105803f4d779fa98fc8a34d604aa2c35f50e3ab25ff870daf} of its accounts receivable 90 days or more past due. In fact, half of the amount that is owed is over 90 days past due!

Because they are violating “Stay Float LTD’s” cross age rule, they will have to go without swordfish-shaped cocktail skewers and tiny drink umbrellas until they bring their account current.

Learn More About How Allied Financial Uses Cross Aging to Determine Available Financing

When you receive a working capital line of credit from Allied Financial Corporation, we use cross aging to determine your borrowing base.

Looking for more working capital? Contact Allied Financial Corporation for a free consultation about a working capital line of credit to help your business grow and prosper. Fill out our online contact form to get started on our easy and convenient application process.