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Hi sir, why are the following two statements likely to lead to an increase in receivables collection period ? I don’t understand. Could you explain ?
A) A new contract with a large customer has been won following a competitive tender
B) A large one-off credit sale has been completed just before the year end.
I get the feeling that you haven’t given me full / correct information
The first point – is it really a “new contract with a large customer” or is it a “large contract with a new customer”
Either way, I can only imagine that, because it was a competitive tender, we are offering extended credit terms and thus the receivables collection period would increase
I suppose, as an alternative explanation, it could be the case that this contract has been won and commenced shortly before the year end
For B, the key here is in the word ‘one-off’
This is an unusual sale, not one of the regular every-day normal kind of sales and it has occurred just before the year end so receivables are unusually high. In fact, the customer could pay us ‘tomorrow’, well within the normal credit time scale, but our calculation of receivables days takes no account of subsequent events
OK?
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