In a simple 3-statement projection, which rule is commonly used for projecting accounts receivable (AR)?

Study for the Private Equity Interview Test. Prepare with a range of questions and expert explanations to ensure success in landing your dream role. Optimize your readiness for the interview process!

Multiple Choice

In a simple 3-statement projection, which rule is commonly used for projecting accounts receivable (AR)?

Explanation:
In a simple three-statement projection, accounts receivable is typically estimated as a percentage of revenue. Receivables arise from sales on credit, so they generally scale with the amount of revenue you recognize. Using AR as a share of revenue mirrors how much cash is still owed from recent sales. You can think of it as AR ≈ (DSO/365) × Revenue, where historical days-sales-outstanding informs that percentage. For a quick example, if next year’s revenue is 500 and the AR percentage is 20%, AR would be 100. Tying AR to COGS, OpEx, or SG&A would imply receivables move with costs or expenses rather than with sales, which doesn’t align with how receivables are generated.

In a simple three-statement projection, accounts receivable is typically estimated as a percentage of revenue. Receivables arise from sales on credit, so they generally scale with the amount of revenue you recognize. Using AR as a share of revenue mirrors how much cash is still owed from recent sales. You can think of it as AR ≈ (DSO/365) × Revenue, where historical days-sales-outstanding informs that percentage. For a quick example, if next year’s revenue is 500 and the AR percentage is 20%, AR would be 100.

Tying AR to COGS, OpEx, or SG&A would imply receivables move with costs or expenses rather than with sales, which doesn’t align with how receivables are generated.

More Multiple Choice Questions
Subscribe

Get the latest from Passetra

You can unsubscribe at any time. Read our privacy policy