Sales up 30%, but how much cash came in?
Strong revenue growth is welcome news, but revenue is recorded when goods or services are delivered, while cash arrives later. What accumulates in between is accounts receivable. When receivables grow much faster than sales, part of the reported growth has not yet turned into cash.
This guide shows how to calculate days sales outstanding, read aging schedules and credit-loss allowances, and check customer concentration and cash flow, using hypothetical numbers. It also sets out how to tell normal growth in receivables from a warning sign.
The gap between revenue and collection
IFRS 15, and its U.S. counterpart ASC 606, require revenue to be recognized when control of goods or services passes to the customer, regardless of when the customer pays. On 60-day terms, revenue lands in this quarter while the cash may arrive in the next.
That gap is normal. The concern is when it keeps lengthening, or when payment terms are loosened to pull revenue forward. Heavy shipments at quarter-end with long payment terms or generous return rights can lead to reversed sales or slow collections later.
Calculating days sales outstanding
Days sales outstanding (DSO) is year-end receivables divided by annual revenue, multiplied by 365. It shows, on average, how many days after a sale the company gets paid. The two hypothetical companies below both grew revenue in the same year.
| Company | Revenue last year | Revenue this year | Receivables last year | Receivables this year | DSO |
|---|---|---|---|---|---|
| A | 1,000 | 1,300 | 123 | 160 | 45 → 45 days |
| B | 1,000 | 1,050 | 123 | 173 | 45 → 60 days |
A's receivables grew in line with sales, so DSO is unchanged. B's sales rose 5% while receivables rose 40%, and it now takes 15 days longer to get paid.
Aging schedules and credit-loss allowances
The receivables note often includes an aging schedule that splits balances into categories such as not yet due, up to 30 days past due, and more than 90 days past due. A growing share of old balances signals declining collectability.
IFRS 9 requires companies to estimate the amounts they do not expect to collect and record them as an expected credit loss allowance; U.S. GAAP uses a similar current expected credit loss model. If past-due balances rise but the allowance does not, losses may be recognized late; if the allowance jumps, management is acknowledging the risk. Track the allowance as a percentage of gross receivables over time.
Customer concentration
When receivables are concentrated in a few customers, one customer's financial health can drive the company's cash flow. Check major-customer disclosures in the segment or revenue notes, and consider the economic conditions in those customers' industries.
Receivables from related parties deserve separate attention. Balances owed by affiliates or companies linked to major shareholders may carry looser terms than ordinary customers, and it can be hard to tell whether the terms are at arm's length.
As a hypothetical example, if one customer owes 35% of a company's receivables and that customer's own industry is in a downturn, a single late payment could swing the company's quarterly operating cash flow from positive to negative.
Compare with cash flow
Changes in receivables appear directly in the operating section of the cash flow statement. If net income rises while operating cash flow falls, and most of the gap is a rise in receivables, the quality of earnings is worth questioning.
Factoring or securitizing receivables, selling them to a financial institution, reduces the balance and can flatter operating cash flow. Check the notes for receivables sales or securitization programs to see whether a cash-flow improvement came from operations or from a financing arrangement.
A filing checklist
Investor.gov's guide to the 10-K points to the financial statements and the MD&A's liquidity discussion. A practical order for receivables:
- Calculate DSO from revenue and period-end receivables for three to five years, and quarterly.
- In the receivables note, track the share of past-due balances, especially those over 90 days.
- Check the allowance balance, its ratio to gross receivables, and the year's provisions and write-offs.
- Note major-customer and related-party receivables.
- Compare the receivables change and operating cash flow with net income, and look for factoring or securitization disclosures.
Limits of receivables metrics
DSO uses period-end balances, so it can be exaggerated or understated for companies with heavy quarter-end shipments or strong seasonality. Normal payment terms also vary a great deal by industry.
The companies in the table are hypothetical. For real analysis, use the latest filings with their dates and compare DSO with peers over the same periods.