Sales and Accounts Receivable

Every company focuses on growing sales. That’s good, but how many also track the growth of accounts receivable? Often the growth of one does not mirror the growth of the other. There is not necessarily a one to one relationship between sales and accounts receivable.

A Quick Look

Consider the quarterly results for a hypothetical company as shown in the chart below.

ar and sales

The lines in the chart above represent the trends. The top line is the accounts receivable trend, the middle line is the sales trend, and the bottom line is the cash generated trend. Notice that the trend for sales and accounts receivable are diverging. The rate of increase in accounts receivable far exceeds that of sales. As a result, the growth rate of cash generated is not nearly what it should be based on the sales growth.

Some Observations

In the example above it is important to note that cash generated impacts the cash balance for the company only as it relates to sales and accounts receivable. On top of this we must also consider the impact of outlays for inventory, operating expenses, and other things such as interest and debt payments.

Also, note that in the example the real culprit is the growth in accounts receivable. Getting accounts receivable under control represents a real opportunity to improve the liquidity of the company. For more on this see the articles 3 Low Cost Sources of Cash – Part 2 and Accounts Receivable Days Outstanding Analysis.

The Bottom Line

The bottom line of all this is merely to say that sales and accounts receivable are both things that need to be monitored. While we generally do want to see sales accelerating, we also want to be sure that we are collecting those sales. Though technically a sale is a sales once it happens, from a practical standpoint it helps to remember that until it is converted to cash the sales cycle is not really complete.

Does your company monitored accounts receivable as closely as it does sales? Accounts receivable can often be the largest asset on a balance sheet, so it pays to manage it appropriately if you want to have ample cash to operate.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.


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