Interview question.. tricked?
I was asked today, sales are increasing 5% and AR increasing 10%... under what circumstances is this a good thing?
was this a trick question?
anyway, i stumbled through it.
So... 0.5% of those sales are on credit, which is probably a good thing? Not sure what else to take away from this
This would only be a good thing if their AR turnover is high. In this example, your AR is growing twice as fast as your sales... If the company had a low AR TO, then this is bad.
What good does it do for a company to make sales if they never collect them?
You have a new layaway program which accounts for a large percentage of new sales. I assume most of those people are marginally creditworthy and they will actually pay you in the near future.
That would be good. There would be many other similar examples. Don't overthink this stuff, it is usually pretty common sense.
DF, thats exactly what I said, and he wanted another example. It was 2nd round ER, first time interviewing for this role.
are there other instances that would make this a good thing? or did he just want me to push back and tell him "thats it"
Here is another view, It would only be a good thing if AP is increasing greater than 5%. I feel this is cash flow logic. because you would think sales and A/R increasing is a good think but only make sense if cash out flow balance this out.
To expound on Dick's answer, there are many answers. As long as the receivables aren't ending up in a bad debt bucket, or the DSO isn't stretching out to an absurd amount of time where your cost to carry them will erode the margins beyond your return targets it should be good.
Real life example: we bought an infrastructure service company that had a mix of customers, credit and non credit (and I mean actually rated by the agencies). They were all on net 15-30. We knew before we bought them that we could secure a large MSA with a Fortune 20 with perfect credit but they were horrible payers and the MSA would have net 60-90 terms (but we would always eventually get paid). But over a 2-4 year timeframe we thought we could grow overall revenue between 200-400% just with them and at least keep existing margins. We were buying the company from a non-sophisticated founder/family who had an elementary capital structure in place that comprised of his equity and a single operating line. We set up receivable financing, not even with real factoring terms just lines with our banks, with buckets based on our customers credit that basically cost us nothing (because they were AA or something) and because a lot of their other vendors were small and unsophisticated and we didn't huff and puff until 120 days, their regional guys started sending us all their work. No matter how large a company is, such as a Fortune 20, a lot of decisions are made by mid level managers whose bonuses can vary if they can do stupid shit like not pay for an extra 30 days. The bump from that one new customer alone increased revenues by over 400% in a little over two years and we started going to other customers and giving them better payment terms. It seemed silly that our relatively small company was financing multiple Fortune 100 company's payables, but it increased everything in our company-revenue (by year 4-5 we were up nearly 700% from base), margins increased (we also put a lot of work into ops increasing margins) and our receivables exploded. From 15-30 days DSO to 90 (+ at some points of the year), but we had almost no bad debt and it cost us next to nothing to finance and our lenders were fine with increasing those lines because they were underwriting their credits.
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