Case 008Forensic accountingCore

Nerevo Agrochem books 45% of its annual revenue in the fourth quarter against 30% historically, and year-end receivable days jump from 90 to 150. Estimate how much revenue may have been pulled forward.

The situation

Nerevo Agrochem sells crop protection chemicals through dealers. Revenue for the year was Rs 2,000 crore, up 12%. Over the past five years the fourth quarter has carried about 30% of annual revenue, with the first three quarters at 22%, 23% and 25%. This year the quarters were 18%, 17%, 20% and 45%.

Receivables at year end were 150 days of revenue against a steady 90 days before. Gross margin is 35%. Management says a strong late season and new dealer schemes drove the fourth quarter.

Your task

Give a range for how much revenue may have been pulled forward from next year, show two ways of estimating it, and say what you would check.

Quick check

Which evidence is stronger on its own that sales were pulled forward?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Roughly Rs 329 crore to Rs 429 crore, about a sixth to a fifth of the year's revenue. If the fourth quarter had carried its usual 30%, it would have been about Rs 471 crore, not Rs 900 crore, an excess of about Rs 429 crore. Receivables of 150 days instead of 90 hold about Rs 329 crore of extra unpaid sales. Both point the same way: stock pushed to dealers on longer credit.

Step 1What does pulling revenue forward look like?

A shopkeeper told to hit a monthly target can ring up next month's sales today by sending goods to regular customers on credit. The till looks good this month; next month's sales are empty and the money arrives late, or not at all. Channel stuffingShipping more goods to distributors or dealers than they need, often on easier credit terms, so revenue is booked earlier than end demand justifies. leaves two marks: revenue bunched at the period end, and receivables that grow faster than revenue. Nerevo shows both.

Two fingerprints of pulled-forward sales: a late spike and unpaid bills22%18%Q123%17%Q225%20%Q330%45%Q4HistoryThis yearShare of the year's revenue, by quarter90 daysRs 493 croreNormal150 daysRs 822 croreThis year endReceivables at year end
Nerevo's fourth quarter carried 45% of the year's revenue against a 30% norm, and receivables at year end rose from 90 to 150 days, from about Rs 493 crore to Rs 822 crore, the two signs of sales pulled forward onto dealer credit.
Step 2How do you put a number on it two ways?

From seasonality: the first three quarters brought Rs 1,100 crore. If the fourth quarter had its normal 30% share, the first three would be 70% of the year, so the fourth quarter would be 1,100 x 30/70, about Rs 471 crore. Reported fourth quarter revenue of Rs 900 crore is about Rs 429 crore above that norm. This overstates the pull-forward if part of the season genuinely shifted late.

From receivables: 150 days of Rs 2,000 crore is about Rs 822 crore, while 90 days would be Rs 493 crore. The extra Rs 329 crore is revenue that has been booked but not collected beyond the normal credit period. This is a floor on the problem if some pushed stock was also sold for cash at a discount.

MethodWorkingRs crore% of revenue
Seasonality900 - 1,100 x 30/7042921.4%
Receivables(150 - 90) / 365 x 2,00032916.4%
Range329 to 429
Gross profit at 35%115 to 150
The seasonality method puts the pull-forward at about Rs 429 crore and the receivables method at about Rs 329 crore, so between 16% and 21% of the year's revenue, carrying Rs 115 to 150 crore of gross profit.
Step 3What would you check before calling it?

Three things, each able to change the answer. First, next year's first quarter: if it comes in well below its usual 22%, dealers were stocked up. Second, the notes on sales returns and credit notes issued after year end, and any provision for doubtful debts. Third, peers selling into the same season: if their fourth quarters were also heavy, the weather explains some of it. Say what it costs: Rs 115 to 150 crore of gross profit may belong to next year, which would make this year's 12% growth look far weaker.

Where candidates lose it

Candidates spot the 45% and call it fraud. A late season can legitimately shift sales, and an accusation built on one number collapses when the interviewer says the monsoon was late.

The stronger answer uses two independent estimates that bracket the number, names the innocent explanation, and says which future data point would separate them.

What the interviewer asks next

  • Operating cash flow fell while profit rose 12%. How does that change your view?
  • How would you adjust next year's revenue forecast for the pull-forward?
  • What would the auditor's report or the notes need to say to worry you more?

Company names and figures are illustrative.