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no
it mean the company will face problem with cash
i think
Apart from reasons stated above, the main reason could be the revenue recognition criteria the company follows as per its Accounting standards.
It is posible to raise invoice and book AR and not book the revenue. This happens in project accounting. Therefor your AR is increasing but Sales not.
they should not grow too much, because this means that your credit receivable is growing, so your customers are not paying your invoices, not good for you.
so make sure to have raisonable credit terms in the contracts with your customers, and reduce DSO as much as possible
Most likely the company is financing its customers by extending its days sales outstanding
Account receivables grow faster than sales means that you are talking about a low receivable turnover ratio comparing to the industry slandered
Receivables Turnover Ratio is one of the efficiency ratios and measures the number of times receivables are collected, on average, during the fiscal year. Receivables Turnover Ratio formula is:
Receivables turnover ratio measures company's efficiency in collecting its sales on credit and collection policies. This ratio takes in consideration ONLY the credit sales. If the cash sales are included, the ratio will be affected and may lose its significance. It is best to use average accounts receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken into consideration when calculate net accounts receivable.
Accounts receivable represents the indirect interest free loans that the company is providing to its clients. Therefore, it is very important to know how "costly" these loans are for the company.
A high receivables turnover ratio implies either that the company operates on a cash basis or that its extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection of cash, while a low number means collection takes longer.
The lower the ratio is the longer receivables are being held and the risk to not be collected increases. A low receivables turnover ratio implies that the company should re-assess its credit policies in order to ensure the timely collection of credit sales that is not earning interest for the firm.
A ratio that is low by industry standards will generally indicate that your business needs to improve its credit policies and collection procedures.
If the ratio is going up, either collection efforts may be improving, sales may be raising or receivables are being reduced.
Receivables turnover ratio is figured as "turnover times". A popular variant of this ratio is to convert it into an average collection period in terms of days.
Sign of danger, it means your customer is not paying against your invoices.
Most likely the company is financing its customers by extending its days sales outstanding (DSO)
Accounts receivables should track sales. Something’s amiss when receivables increase significantly faster than sales. It’s a red flag when you detect that happening. The reasons receivables can grow faster than sales include:
1. Accounts receivables department falling behind in billing or dunning customers
2. The Credit terms offered are very long
3. Unhappy customers are withholding payments
4. Channel stuffing
5. Customers cannot pay their bills
In general, the latter two reasons are the more serious
A/R shows the accumulated balance of the customers, while Sales a/c shows the balance for the specific period. Due to this reason, A/R may exceed the sales balance. If your customers follow the credit terms as agreed upon and discharge their liabilities accordignly, A/R normally does not exceed the Salas A/c. Company should aware of that late receiving from customers increase the working capital requirement that involve financing cost if arrange externally. It is, therefore, effective debt collection policy/policies should be used.
The reason for this Terms of SaleOr conditions of purchase
maybe faulty credit policy.Delay/defaults in collections.Booking of unreal revenue for the purpose of showing achievement of targets.Enbezzlement of cash collections ia possibility.A thorough audit is required.
There are number of reasons behind this.First bargain power of the customer .If there is a stiff competation in the market ,in orderto attract and retain the customers, loose credit terms may be allowed to customers.So in the end receivables will start to grow fast as compared to the sales.
Second reason, bad management policy poor collection and follow up .Suppose if company 's policy is pay the commission to selling agents upon sale with out taking notice of its recoverablity then agents focus is to increase selling units to maximise its commission rather than to increase the collection from customers or some thing like that
3rd reason, Failure to develp the strategy which focuses the customers to pay early through introducing discounts,bulk options or other facilities etc.
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