Rising Receivables: Sales Growth or Slower Collections?
Analyze rising receivables through sales growth, collection periods, overdue balances, and loss allowances. Learn how to compare collection speed without relying solely on closing balances.
Receivables can increase because credit sales expand or because collections slow. Look beyond sales growth to collection days based on average receivables and the breakdown of overdue balances. Whether revenue was recognized appropriately and whether the cash is collectible are separate questions.
Choose receivables that match the scope of sales
Trade and other receivables on the balance sheet may include amounts not directly related to operating sales. Separate trade receivables in the notes and match consolidated sales with consolidated receivables. If the share of overseas customers has increased, check whether currency translation raised the won value of receivables. Calculations using closing receivables alone can be disproportionately affected by large deliveries just before the reporting date. Use quarterly or monthly average balances where possible. If those data are unavailable, disclose the limitation of using the average of opening and closing balances.
Collection days and overdue schedules answer different questions
Dividing average receivables by credit sales and multiplying by the number of days in the period gives an approximation of collection days. If credit sales are unavailable and total sales are used instead, changes in the proportion of cash sales can distort the measure. Longer collection days alone do not establish credit deterioration. Examine overdue aging buckets to determine whether new large customers have longer contractual payment terms or more receivables have passed their due dates. Reviewing customer concentration and changes in loss allowances also helps uncover risks hidden by averages.
Check transactions that resemble better collections
Receivable sales, factoring, or write-offs can reduce closing receivables and make collection days appear better. The cause differs from customers actually paying sooner, so cross-check the notes on transferred financial assets and bad debt movements. Disclosures of subsequent cash collections are useful, but collection details for every customer are not public. Leave matters that cannot be verified from public information as estimates. Do not label a simple balance increase accounting fraud or conclude that collateral eliminates collection risk. If one major customer's payment shifts from the end of one quarter to the beginning of the next, balances can swing sharply. Where available, look for explanations of customer contract changes and collections after the reporting period to supplement the limitations of averages.
Worked example
Hypothetical example: Annual credit sales of KRW 73 billion and average receivables of KRW 10 billion give collection days of 10÷73×365=50 days. The following year, credit sales of KRW 87.6 billion and average receivables of KRW 14.4 billion give 60 days. Sales rose 20%, but average receivables rose 44%. To interpret these figures, establish whether the additional 10 days reflect normal payment terms in new contracts or accumulated overdue balances.
What to check
- Have you distinguished other receivables from trade receivables?
- Have you used total sales in place of credit sales?
- Have overdue aging and customer concentration deteriorated?
- Have factoring, write-offs, or currency translation reduced the balance?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.