How companies fake sales — And how you can catch It

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How companies fake sales - And how you can catch It

Do CAs even sleep during the financial year-end? :’)
At least that’s what my CA friends say - they’re always buried under spreadsheets and balance sheets. And well, they’ve got a tough job… sometimes even making those financial statements look good when reality isn’t that rosy.

One of the oldest tricks in the corporate playbook - especially in sectors like Manufacturing, FMCG and Auto - is something called “Channel stuffing”

Here’s how it works

  1. Massive product push: Companies push huge amounts of products to their dealers on credit, right before the year ends.

  2. Paper Profits: On paper, revenue skyrockets! Investors cheer, thinking business is booming.

  3. Reality Check: The company hasn’t received a single rupee yet. And if demand isn’t strong, they might never collect that money.

Your secret weapon: The Balance Sheet

The key to spotting this is “Trade Receivables” - money customers owe the company, found under “Current Assets.”

Here’s the crucial part most retail investors miss: If Trade Receivables are growing significantly faster than Sales, that’s a major red flag :police_car_light:. It often means the company is pushing products on credit just to make its sales numbers look attractive.

Let’s understand with an example

Imagine a company, “Fictional Motors,” with these sales figures:

  • FY22 Sales: ₹100 Cr

  • FY23 Sales (till March): ₹80 Cr

Uh-oh - that’s a problem. Sales have dropped, and the company’s share price could take a hit. So, what does the management do? They push ₹40 Cr worth of products on credit to dealers in March.

Now the “magic” happens:

  • The Profit & Loss statement shows ₹120 Cr revenue - a fantastic 20% growth!, and the stock price booms.

  • But a closer look at the Balance Sheet reveals that Trade Receivables have also increased by ₹40 Cr!

See what happened? Fictional Motors manufactured growth out of thin air by booking sales that haven’t actually brought in any cash.

Final Takeaway

“Real sales bring real cash. Fake sales pile up as receivables.”

Before investing, always do this quick check: Compare Trade Receivables growth with Sales growth. If receivables are rising much faster - it could mean the company is artificially inflating its revenue numbers.

Over to you: What are some of the smart checks or signals you look for in a company’s financials before investing? Share them below - your approach might help another investor make a better decision.