3.7. Cash, Receivables, and Inventory
Lesson objective
Evaluate short-term assets.
Cash and equivalents provide immediate liquidity, although some balances may be restricted. Accounts Receivable represents billed amounts not yet collected. Inventory includes products or inputs held for sale or production.
Receivables growing much faster than Revenue may indicate slower collections. Inventory growing without matching sales may signal weaker demand or preparation for expansion.
Industry context matters. Banks, retailers, and software companies have very different balance sheets.
Working capital can consume or release cash
DSO ≈ Average accounts receivable ÷ Revenue × Days in period
Inventory turnover ≈ Cost of goods sold ÷ Average inventory
Receivables signal
Revenue grows 10%, but receivables grow 40%. This does not prove a problem, but it raises questions: are customers paying more slowly, did terms change, or was growth concentrated late in the quarter?
Visual checks:
Sales ↑ + Receivables ↑ much faster → investigate collections
Sales ↑ + Inventory ↑ much faster → investigate demand, stocking, or obsolescence
Always consider seasonality and the company's operating model.
What you should remember
- Compare short-term assets with sales and operating cash flow.
- Do not assume every current asset has equal quality.
Practice
Compare growth in receivables and inventory with Revenue growth.