How FDD analysts read accounts receivable in a deal: ageing, DSO, customer concentration, bad-debt provisioning, credit notes, cut-off and the working-capital peg.
Show me a company's trade debtor ledger and I will tell you more about it than the management accounts ever will. Accounts receivable is the quiet witness of a business: it records not what a company says it sold, but what customers have actually accepted, and — through the pattern of who pays and who doesn't — whether that revenue was real, durable and collectible. In Financial Due Diligence, receivables are read twice over. Once as the largest moving part of net working capital, where they feed straight into the price mechanism. And once as a quality lens on revenue itself, where a swelling debtor book or an anaemic provision can betray channel stuffing, weak credit control and earnings that have been flattered for the sale. The two readings talk to each other constantly, and the analyst who keeps both in view at once is the one who spots the problem before it reaches the SPA.
For most trading businesses, trade debtors are the single biggest current asset. That alone makes them central to the net working capital analysis, because the level of receivables at completion directly affects the cash the buyer inherits and the working-capital adjustment that settles the price.
But receivables also carry information that a revenue analysis on its own cannot. Revenue tells you what was invoiced; receivables tell you what was collected, and how quickly. A business can book aggressive revenue in the final quarter before a sale, but if those invoices are still sitting unpaid ninety days later, the debtor book preserves the evidence. This is why an FDD team never looks at receivables in isolation — it triangulates the ageing profile against the revenue trend, the provision against actual write-offs, and the debtor days against the sector norm.
Takeaway: receivables are both a balance-sheet item that moves the price and a diagnostic that tests the credibility of reported revenue. Analyse them as one thing and you will miss half the story.
The ageing analysis — debtors split into current, 30, 60, 90 and 120+ day buckets — is the first thing an FDD analyst asks for. It is the closest thing receivables have to an X-ray.
A healthy book is weighted heavily to the current and 30-day columns, with a thin and stable tail. Deterioration shows up as a lengthening tail: an increasing proportion of the balance drifting into the 90+ and 120+ buckets over successive month-ends. That drift is rarely random. It can mean the sales team is pushing product onto customers who cannot pay, that credit control has been let go, or that specific large accounts are in genuine distress.
The analyst tracks the ageing as a trend across several period-ends, not as a single snapshot. A snapshot flatters; a trend reveals. If the 90+ bucket has grown from 4% to 14% of the ledger over eighteen months while revenue was reportedly "growing", something in the growth story is not paying its bills.
Days sales outstanding (DSO) condenses the ageing into a single figure: how many days, on average, the business waits to be paid.
$$\text{DSO} = \frac{\text{Trade receivables}}{\text{Revenue}} \times \text{Days in period}$$
Rising DSO is a classic FDD flag. It can indicate deteriorating collections, a deliberate loosening of credit terms to buy revenue, or a shift in customer mix towards slower-paying segments. Falling DSO is usually good — but not always. A sudden drop right before completion can be a sign of factoring or a one-off collections push engineered to make the balance sheet look leaner at the reference date, only to snap back afterwards.
DSO must always be read against context: the sector, the payment terms actually granted, and any seasonality. A business that invoices heavily in the final month of the period will show a mechanically high DSO that says nothing sinister. Judgement, not the ratio alone, is what earns the fee.
There is also a subtler version of the metric worth knowing. Best-possible DSO measures collection performance against only the current, not-yet-due balance, isolating how efficiently the business collects invoices that are within terms. Comparing actual DSO to best-possible DSO separates two very different problems: a business that invoices on long terms but collects diligently, versus one whose terms are fine but whose credit control has fallen apart. The first is a commercial choice; the second is an operational weakness the buyer will inherit. FDD teams that only quote a headline DSO miss this distinction entirely.
Consider a distributor with a €4.0m trade debtor book. Management carries a bad-debt provision of €120k — 3% of the ledger. The FDD team pulls the ageing and applies a loss-rate to each bucket based on the target's own three-year history of actual write-offs.
| Ageing bucket | Balance (€) | Historical loss rate | Expected loss (€) |
|---|---|---|---|
| Current | 2,400,000 | 0.5% | 12,000 |
| 31–60 days | 700,000 | 2% | 14,000 |
| 61–90 days | 450,000 | 8% | 36,000 |
| 91–120 days | 300,000 | 25% | 75,000 |
| 120+ days | 150,000 | 60% | 90,000 |
| Total | 4,000,000 | 227,000 |
The evidence-based provision is roughly €227k, against the €120k management has booked. The debtor book is over-stated by about €107k, and reported profit has been flattered by the same amount in whichever period the shortfall accrued.
That €107k does not simply vanish. It flows through the FDD conclusions in two ways. First, it is a candidate EBITDA adjustment if the under-provisioning has depressed the historical bad-debt charge — sitting alongside the other items in the EBITDA adjustments overview. Second, and often more importantly, the over-stated receivable overstates the working-capital position at the reference date, which feeds the working-capital target the parties will peg the price to.
A €107k provision gap is not a rounding error. On a business valued at 8x EBITDA, if it feeds an earnings adjustment it can move enterprise value by the best part of a million euros. This is why receivables work is fee-earning, not box-ticking.
Two debtor books can have identical totals and identical DSO, yet be worlds apart in risk. The difference is concentration. A €4m ledger spread across four hundred customers is a diversified, resilient asset. The same €4m sitting in three accounts is a fragile one — the loss or slow payment of a single customer swings the whole picture.
FDD dovetails the receivables concentration analysis with the broader work on customer concentration. A single debtor representing 30% of the book is a live diligence item: what are the terms, is the relationship contracted or at-will, has that customer's payment behaviour changed, and is there any dispute lurking behind the balance? Concentration in the debtor ledger is often the first visible symptom of concentration in the revenue base itself.
The dark art of receivables analysis is testing whether the revenue behind the debtors is genuine and correctly timed. Three tools do most of the work.
Credit notes. A spike in credit notes issued shortly after the period-end is one of the most reliable tells of aggressive revenue recognition. It suggests goods or services were invoiced before the customer had truly accepted them, then reversed once the reference date had safely passed. The FDD team pulls the post-period credit-note run and matches it back to pre-period invoices.
Cut-off testing. The analyst checks invoices raised in the final days of the period against dispatch or delivery evidence. Revenue booked before the goods left the warehouse, or before the service was rendered, is revenue in the wrong period — and it inflates both the top line and the debtor book. This work is part and parcel of the wider revenue quality analysis.
Channel stuffing. The classic manoeuvre: pushing excess stock onto distributors near period-end to hit a number, on terms so generous that the customer would never buy at that pace organically. The signatures are a receivables spike concentrated in a few distributor accounts, a lengthening ageing tail, and a wave of returns or credit notes afterwards.
None of these on its own is proof. Together, a swelling debtor book, rising DSO, a post-period credit-note spike and concentration in a handful of distributors form a pattern that belongs squarely in the red flags of FDD.
Every adjustment the FDD team makes to receivables eventually lands in the price mechanism. Under a completion-accounts deal, the working-capital adjustment trues the price up or down against a target (or "peg"), and the level of trade debtors is one of its largest components — the mechanics of which sit in the locked-box versus completion accounts debate.
Two questions dominate.
First, normalisation. If the debtor book at the reference date is abnormally low because of a pre-completion collections sprint or a spot of factoring, the target must be set on a normalised basis so the seller cannot game the mechanism. FDD's job is to identify the normal, mid-cycle level of receivables and warn the deal team where the reference date does not represent it.
| Working-capital driver | Impact if overlooked |
|---|---|
| Under-provisioned bad debt | Overstates receivables and the peg; buyer overpays |
| Pre-completion collections push | Temporarily deflates receivables; distorts the target |
| Factored / assigned receivables | May belong in net debt, not working capital |
| Seasonality in the debtor book | Wrong reference date sets the peg at the wrong level |
Second, classification. Factored or assigned receivables raise the question of whether the associated funding is a working-capital item or a debt-like one. Get that classification wrong and the same balance is either double-counted or missed entirely in the enterprise-to-equity bridge. The discipline here mirrors the judgement calls in any financial due diligence process: the number matters, but so does the box you put it in.
Receivables questions are a favourite in Transaction Services interviews precisely because they force you to connect the balance sheet, the P&L and the price. A common prompt: "A target's trade receivables have grown much faster than revenue over the last two years. How would you investigate?"
A strong answer connects the dots without rushing to a verdict:
"I'd start with the ageing, tracked across several period-ends rather than at a single date, to see whether the growth is sitting in the older buckets. Then I'd calculate DSO over the same period — if it's rising alongside the receivables growth, that points to a collections or revenue-quality issue rather than just scale. I'd test the bad-debt provision against the target's own history of actual write-offs by bucket, because under-provisioning would flatter earnings and overstate the debtor book. I'd pull post-period credit notes and cut-off evidence to check whether revenue was being pulled forward or invoiced before acceptance, and I'd look at concentration — whether the growth is coming from a handful of distributor accounts, which would make me think about channel stuffing. Ultimately I'd want to quantify the impact two ways: as a possible EBITDA adjustment for any under-provisioning, and as a normalisation of the working-capital target so the buyer isn't overpaying for a debtor book that won't collect."
That answer works because it moves from symptom to test to price impact, and it never confuses a red flag with a conclusion.
The trade debtor ledger rarely lies, even when the management accounts do. It records who actually paid, how long they took, and how much the business quietly wrote off along the way. Learn to read it — the ageing tail, the drifting DSO, the credit-note spike after the reference date, the three accounts that hold the book together — and you will catch the problems that never make it into the information memorandum. In this job, the number on the face of the balance sheet is the beginning of the analysis, never the end of it.
The Transaction Services Interview Programme (€119.99, one-time) includes a full receivables case: ageing and DSO analysis, a bad-debt provisioning model, credit-note and cut-off testing, and a walkthrough of how the shortfall feeds both the EBITDA adjustments and the working-capital peg. Enrol today.
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