When Receivables Tell a Different Story

The balance sheet tends to get skipped when evaluating a business. Revenue, EBITDA, maybe cash flow. The balance sheet is just the thing that has to balance.

That's where you miss the most interesting signals.

This company's accounts receivable went from $78 million to $27.5 million over two years. A 65% decline. Revenue over the same period fell 11%.

Receivables dropped six times faster than revenue.

There are three possible explanations, and they lead to very different conclusions.

First: collections improved dramatically. Maybe new management tightened credit terms, chased outstanding invoices, and got the cash cycle under control. Days sales outstanding went from well over 100 days to 60 days. If that's the real explanation, it's a significant operational improvement.

Second: the revenue mix shifted. This company divested a segment that operated as a technology platform with high gross revenue, long payment cycles, and significant pass-through costs. That segment's receivables would have been enormous relative to net revenue because clients were being billed for spend that flowed through the company's books. Remove that segment and the receivable balance drops mechanically, with no improvement in underlying collection efficiency.

Third: the revenue base became smaller and more concentrated. When you lose 30% of revenue, you lose a proportion of the invoices generating receivables. If the lost revenue was disproportionately project-based (as opposed to retainer), the receivables impact is amplified because project work typically carries longer collection cycles.

The truth is likely a combination of all three. But the critical insight is that a receivables movement can't be evaluated without understanding the revenue composition change behind it.

The working capital story is actually net positive. $3.9 million favourable movement versus a $500,000 drain the prior year. But that improvement came alongside a massive reduction in operating scale. Working capital is easier to manage when there's less of it.

The relationship between changes is what matters, not the changes themselves. Revenue down 11%, receivables down 65%, payables down 42%. Those three numbers moving at wildly different rates tell you the business model is structurally different from what it was two years ago. The shape of revenue has changed, not just the size.

That's something no income statement will ever show you.