Text says it could indicate aggressive revenue recognition…but What’s added to receivables is also booked as revenue, so how can receivables grow faster ?
Revenues are made up of credit sales and cash sales. So your cash sales have to be declining or at least growing at a slower pace which is obviously bad news.
Rate of growth is measured as a %age of either sales (for sales growth) or of receivables (for growth of receivables). Growth of sales and receivables is not measured in dollar terms, which, as you said, would be the same.
Then it should ask: How can receivables grow faster than *cash* sales?
ummm you sell more stuff on credit than you do for cash?
No, look at the growth rate in %, not absolute dollars, as Drakesterling said. Receivables grow faster than sales, not just cash sales.
That’s kind of what i was thinking. Sales are likely larger than AR in total dollars, and thus it’s possible that a change in AR could exceed the % increase in sales.
However, if everything was sold on credit (no cash sales), then wouldn’t they be the same (% change that is)?
Assuming you have material cash sales then, your growth in Sales should exceed growth in AR, no? Just seems like mathematically, if AR is much much smaller, then it’s bound to increase more than sales…perhaps regardless of cash sales.
> if AR is much much smaller, then it’s bound to increase more than sales
THAT’S RIGHT AND THAT’S WHY IT DOESN’T MAKE SENSE TO LOOK AT GROWTH%. … sorrry didn’t realize caps on.
A credit department lacking discipline on collections policies.
Say sales in year 1 were 100, and Credit sales were 10. So credit sales were 10% of total sales. Then in year two sales grow by 20% to 120 and credit sales remain 10% of total, so credit sales are now 12 and they’ve grown by 20%, the same as sales.
But in scenario 2 credit sales increase to 20% of total sales, so sales still grew by 20% to 120, but now credit sales are 24 and have grown by 140%. So when the share of credit sales increases, Receivables will grow faster than sales.
Also if receivables aging increases receivables could grow faster even if the percentage of credit sales stays the same or even drops.