Credit Management and Markov Chains: Partial Balance Aging Method

Abstract

Stryford Ltd is a dealer in agricultural machinery, and in the Spring of 1989 is facing the usual surge in demand from farmers, associated with the improving weather. While this Spring selling period is vital to Stryford, it brings with it problems in the management of working capital. These problems are especially acute in 1989 since Stryford is operating near to its overdraft limit. At the end of March, Stryford’s management have been asked by their bankers to provide a forecast of cash receipts for April, and it is important that this forecast should be as accurate as possible. As a basis for the forecast, Stryford’s management have available data on debts owed by their customers. Debts are classified on a partial balance aging basis — that is by reference to the length of time that has elapsed since a sales transaction created the debt. This data, for the first three months of 1989, is shown on p. 28.