What is the 'Gentry-De La Garza Model'

The Gentry-De La Garza model is a method of managing account receivables that was proposed by college professors James A. Gentry and Jesus M. De La Garza in the mid-1980s. The model categorizes increases in accounts receivables into three areas: sales pattern effects, collection experience effects and joint effect. Together, they equal the difference between the receivables balances and allow companies to increase the speed of cash inflows and reduce the speed of cash outflows.

BREAKING DOWN 'Gentry-De La Garza Model'

Two professors first proposed the Gentry-De La Garza model. James A. Gentry received his education in finance and social studies from Indiana University and Indiana State University, and currently teaches at the University of Illinois at Urbana-Champaign. Jesus M. De La Garza received his masters and Ph.D. in civil engineering at the University of Illinois at Urbana-Champaign, and currently teaches at Virginia Tech.

Reasons for Accounts Receivable Increases

Accounts receivable is the amount outstanding that is owed to a company. The balance in this type of account is made up of sales for which payment was not immediately received, but sold on credit. Accounts receivable can increase for two reasons:

Increase in sales on credit or with delayed billing: Every sale made on credit increases a company's accounts receivable. Some companies don't request payment from a customer until after the services are complete or the product is received, so that amount is also included in accounts receivable. Both of these increases are positive for the company, because it means the company is generating more income that should eventually get paid.

Increase in collections outstanding: Unfortunately, not getting paid by customers is an ongoing issue for companies. Having outstanding balances increases their accounts receivable balance, but they may never collect on them. Large amounts of outstanding collections can be the result of offering the option of buying on credit to customers who are not credit-worthy, or not having the right system in place to collect on unpaid debts.

Why the Gentry-De La Garza Model Is Beneficial

Because it separates receivables into three quantifiable categories, the Gentry-De La Garza model allows financial managers to instantly detect whether an increase in receivables is due to rising sales levels or faulty credit controls. Eroding collections may be a sign the company is not forceful or persistent enough in collecting overdue accounts or that credit is being granted too freely. Being able to recognize these issues right away helps a company refine its processes and become more efficient.

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