Markets

How Groupon Is Getting Worse at Collecting Its Own Revenues

By Jim Edwards

Updated on: September 20, 2011 / 9:41 AM EDT / MoneyWatch

Is Groupon (GRPN) getting worse at collecting its revenues? A look at its "accounts receivable" -- the budget line on its balance sheet that represents money its owed but hasn't actually collected -- suggests so.

There is a debate to be had about whether an increase in accounts receivable is meaningful or not. This business school professor believes that a run up in receivables is a symptom of the type of aggressive revenue recognition that indicates possible earnings manipulation. Some businesses continually run high receivables because they deal with customers who may be on 30-, 60- or 120-day payment plans. Ad agencies, for instance, are one such business because their corporate clients only pay their bills on a monthly or quarterly basis.

Groupon, however, receives virtually all of its revenues from customers' credit cards. Those transactions are virtually instant or take no more than two or three business days. The money is all but guaranteed. So it should have a very low level of accounts receivable on its books

Receivables are recognized as revenue on Groupon's income statement even though the money hasn't actually arrived in Groupon's checking account as long as Groupon has a sale agreement on record -- i.e. from credit card transaction -- and reasonably expects to receive the money. Yet in recent quarters Groupon's accounts receivable has more than tripled as a percentage of its net revenues:

Groupon's accounts receivable as % of net revenues
2009: 5%
2010: 15%
First half 2011: 16.3%

Compared to some other businesses that also collect almost all their revenues from online credit card transactions, Groupon is a laggard:

Accounts receivable as % of revenue in Q2 2011
Amazon: 14.5%
Friendfinder Networks: 11.8%
Overstock.com: 2.8%
Netflix: 0%

Groupon isn't wildly out of whack compared to, say, eBay, which has a 20 percent AR level. But eBay also sells ad space to corporate advertisers -- precisely the type of customer that delays its payments.

A spokesperson for Groupon told BNET that AR is increasing because of the company's aggressive international expansion. In some foreign countries, credit card transaction time is longer than in the U.S. It may take some foreign accounts 30 days to settle, she said.

If that's true, then Groupon has nothing to worry about. The AR percentage will level off and become a boring, predictable asset. Right now, however, it's costing Groupon: in 2010, Groupon's cash took a $35 million hit due to unpaid accounts receivable. That hit increased to $53 million in the first half of this year.

That's a particular problem for the company because currently its entire business model is based on its ability to take in new cash upfront from customers and delay payments to its merchants. Any decrease in its ability to take advance payments from customers is a threat to that model.

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Image by Flickr user happyeclair, CC.