As has been said, probably since the day after Pacioli published: "Balance sheets don't matter until they do."
From The Economist, October 8:
Forget debt. Here is something to villainise
Debt suffers from a bad reputation. In almost every culture, lending and borrowing are maligned, with unflattering idioms common. Yet credit is the lifeblood of capitalism: the ability to lend and borrow facilitates hundreds of billions of dollars of activity every day.
Those looking for a balance-sheet item to gripe about could be a little more inventive. An even less sexy budget line has played an understated role in many financial blow-ups. Receivables, a category of assets that represents the money a firm is owed by its customers but has not yet received, come up again and again, along with the practice of borrowing and lending against future payments. Most recently, a committee appointed by First Brands, an American car-parts firm which filed for bankruptcy on September 28th, said it would investigate if the company’s receivables were borrowed against multiple times over. Although the firm may turn out to have kept to the rules, plenty of others have not.
In their most mundane form, receivables record a simple form of credit. A clothing manufacturer might supply a new line of coats to a retailer without taking payment right away. At an agreed point down the line, the retailer will begin to pay the manufacturer for their stock. In the meantime, the manufacturer records the transaction as a receivable, allowing it to book the revenue.
Rising receivables can disguise a business model under strain, however. Carillion, a building firm, collapsed in 2018, becoming Britain’s largest ever liquidation. Hedge funds had short-sold its stock after noticing accounts receivable were climbing faster than revenues.
On other occasions, receivables are used for brazen fraud. Sunbeam, an American consumer-products firm, restated its results in 1998 after it was found to have inflated its revenue with sales it had not made yet, which were booked as accounts receivable. Satyam Computer Services, an Indian IT company, produced reams of fake invoices, designed to generate receivables and bolster tales of rapid expansion. When Enron, an energy-and-trading giant, crumbled in 2001, its receivables position proved to be illusory.
Receivables are difficult for auditors to scrutinise. Companies have lots of clients. Even when they are legitimate, it is hard to tell how much cash will eventually arrive from them. Shady practices such as “channel stuffing”, which involves sending customers more product than they have ordered and temporarily recognising the additional revenue, require a forensic eye to spot. Barry Minkow, a businessman jailed twice for fraud, was at least honest: “Accounts receivable are a wonderful thing. They are a tool that is used by a fraudster like me, to ask to borrow money mainly, and to show earnings.”....
....MUCH MORE
