Accounts Receivable
Accounts receivable is the balance customers owe a company for goods and services already delivered on credit terms. The revenue has been recognized on the income statement, but the cash has not arrived.
Receivables sit among current assets on the balance sheet, and their behavior reveals how real the reported sales are.
The math
A company with $730M of annual revenue collects about $2M per day. Carrying $100M of receivables, it waits an average of 50 days to get paid ($100M divided by $2M).
Now watch the next year: revenue grows 10% to $803M, but receivables jump 40% to $140M, pushing collection to roughly 64 days. Growth of $73M in sales required $40M of additional cash lent to customers, so more than half the year’s new revenue exists only as IOUs.
| Year one | Year two | |
|---|---|---|
| Revenue | $730M | $803M (+10%) |
| Receivables | $100M | $140M (+40%) |
| Days sales outstanding | 50 days | ~64 days |
If even 10% of that increase never collects, $4M of booked profit evaporates in a future write-off.
The trap
Receivables growing faster than revenue is among the oldest warning signs in accounting, and it still catches investors every year. It can mean customers are financially strained, the company relaxed credit terms to make a quarter, or revenue was recognized more aggressively than deliveries justify.
Whatever the cause, earnings quality is deteriorating while the income statement reads clean, and the eventual correction arrives as a bad-debt charge plus a cash flow shortfall at the same time.
The move
Compute days sales outstanding every quarter and compare it to the company’s own history and to direct competitors, since normal levels differ by industry. Watch the allowance for doubtful accounts as a percentage of gross receivables; a shrinking allowance during rising DSO means management is assuming away the problem.
When receivables and revenue diverge for two consecutive quarters, demand an explanation from the filings before adding a dollar to the position.