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Prior Month's Past Due Collection; Prior Month's Past Due Collected
The prior month's past due collection calculation measures the percentage of the previous month's past due accounts receivable collected in the current month. As such, it is another tool that can be used by organizations to measure the performance of the credit department in collecting A/R in a timely manner from customers granted open account terms. The formula is:
1 minus [The current month's past due balance Divided By Beginning receivables for the prior month]
Some of the frequently heard complaints about this particular measurement include:
- It is too limited if it is not used in conjunction with other measures of collection because it focuses heavily on past due amounts and not on more current amounts;
- It may provide deceptive results when there are major sales changes, especially when sales decline. In such cases, it may appear that prior months collections are better than they actually are because of decreasing sales volume
Edited by Michael Dennis and Michael Zininberg. Mr. Dennis is a business credit consultant and can be reached by email at mcdennis13@yahoo.com