How do you determine a company's percentage of credit sales?

By Richard Loth AAA
A:

First, we should establish the fact that, depending on the industry, most companies' sales are sold with terms of payment (credit sales), typically ranging from 30 to 90 days. Obviously, the use of cash versus credit sales, and the duration of the latter, depends on the nature of a company's business. With consumer goods and services, the credit card has turned most retailers' sales into cash sales. However, outside the consumer field, virtually all sales by business involve, at a minimum, some payment terms, and, therefore, credit sales. In modern times, credit sales are the norm and dominate virtually all business-to-business transactions.

If a company does have a mix of cash and credit sales, a breakdown of this nature would only be found in the notes to the financial statements or in the Management Discussion and Analysis (MD&A) section of a publicly traded company's annual report or Form 10-K. However, we have seldom seen this type of disclosure. (To learn more see Footnotes: Start Reading The Fine Print.)

Implied in this question, is an important analytical point for investors to consider when measuring the quality of a company's operations and balance sheet. In the case of the latter, the accounts receivable line in a company's current assets records its credit sales. It is important for a company's liquidity and cash flow that accounts receivable be collected, i.e., turned into cash, in a timely fashion.

To keep reading on this subject, see Testing Balance Sheet Strength, Using The Cash Conversion Cycle and Understanding The Cash Conversion Cycle.

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