Question

Why would A/R shrink when sales are growing? Example

Answer 1

Generally it is observed that Sales grow at a faster pace than Accounts Receivable due to poor Accounts Receivable management in the entity.

However a situation where Accounts Receivable may shrink and sales may grow may be as follows:

Company shifting from Credit Sales to Cash Sales. This may happen in case of increasing direct sales to Retail Customers on Cash Basis. Thus the Receivable would reduce as Direct Sales may lead to more cash inflows at the time of Sale itself.

Such a Situation may be observed by a Aquaguard Selling Company for example. It can appoint direct Sales persons who carry on door to door Sales on Cash Basis. Its earlier agency based distribution system may be brought to limited extent thus reducing the Accounts Receivable.

Another example may be if Company gives less Credit Period( say 1 month in place of 3 months), then it may have lesser Accounts Receivable though Sales may show rise.