The perils of too much credit

The debtors-to-sales ratio or accounts-receivable-to-sales ratio is a handy metric that has to be monitored regularly as it could potentially serve as a warning sign. This ratio is calculated by dividing the accounts receivable by the total sales. It indicates the proportion of consumers who have purchased goods or services on credit rather than paying cash upfront. Since accrual-based accounting recognises sales regardless of whether or not cash is received, managers can get aggressive and sell on easy terms of credit. This is not a good practice as it risks customers delaying or defaulting on payments later. And therefore, it is important to ensure that there is no sudden unexplained spike in the proportion of customers buying on credit. One caveat: while this metric only gives us the proport

This article was originally published on April 08, 2022.