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.

RELATED FAQS

  1. Why is it sometimes better to use an average inventory figure when calculating the ...

    For a couple of key reasons, average inventory can be a better and more accurate measure when calculating the inventory turnover ...
  2. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the shorter-term health of a ...
  3. How do changes in working capital affect a company's cash flow?

    Working capital represents the difference between a firm's current assets and current liabilities.
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
RELATED TERMS
  1. Working Capital

    This ratio indicates whether a company has enough short term ...
  2. Amortization

    1. The paying off of debt in regular installments over a period ...
  3. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s ...
  5. Accumulated Other Comprehensive Income

    Expenses, gains, and losses reported in the stockholder’s equity ...
  6. Contra Account

    An account found in an account ledger that is used to reduce ...
comments powered by Disqus
Related Articles
  1. A Clear Look At EBITDA
    Markets

    A Clear Look At EBITDA

  2. ROA And ROE Give Clear Picture Of Corporate ...
    Markets

    ROA And ROE Give Clear Picture Of Corporate ...

  3. Beware False Signals From The P/E Ratio
    Fundamental Analysis

    Beware False Signals From The P/E Ratio

  4. Measuring Company Efficiency
    Fundamental Analysis

    Measuring Company Efficiency

  5. Reviewing Liabilities On The Balance ...
    Fundamental Analysis

    Reviewing Liabilities On The Balance ...

Trading Center