Versatility, Inc. Case Study, Accounts Receivable

The balance of the cash account was diminished before year-end by a ballooning accounts receivable balance and heavy investment purchases. The account was more than replenished, however, when sales of common stock brought in $30.6 million.

For the period of Fiscal Year 1997, Versatility’s accounts receivable balance nearly tripled from $5.7m to $16.0m. Sales revenue during the period failed to even double, climbing from $16.5m to $27.4m. In footnote 1 to the financial statements, the company specifies that revenue for licensed software is recognized when the software is shipped. The fact that sales is increasing by such a slow rate compared to A/R is a negative sign, and one that requires further investigation. Reading through the MD&A reveals that several of the company’s key customers have been unable to pay on accounts owed, and have since become delinquent. Roughly $3.0m worth of A/R on Versatility’s books is classified this way, and it is even more concerning that management notes that its customers continue to exercise enough leverage of Versatility that its payment terms continue to be extended. In my opinion, A/R is growing too fast for the rate of growth in sales, and should be considered a warning sign.

Other posts on the Versatility, Inc. case study:
Versatility, Inc. Case Study, Cash Flows
Versatility, Inc. Case Study, Preferred Stock
Versatility, Inc. Case Study, Mortgage Guaranty
Versatility, Inc. Case Study, IPO Initial Public Offering
Versatility, Inc. Case Study, Accounts Receivable