Building a True Value Company: How Accounts Receivable Policies Impact Quality of Earnings

In the journey to create a True Value Company, every decision, from how contracts are drafted to how customers are invoiced, plays a critical role in the sustainability and valuation of your business. A key but often overlooked factor is the management of Accounts Receivable (AR) and its impact on Quality of Earnings (QoE). Let’s explore how AR aging can reveal hidden vulnerabilities and why addressing these issues is essential for creating a business that commands value.

The Ripple Effect of AR Aging on Quality of Earnings

The aging of AR reflects how effectively a company manages its cash flow and customer payments. When left unchecked, aging receivables can erode QoE, which investors and buyers scrutinize when determining a company’s value. Here’s how:

Revenue Recognition Risks
- Overdue Receivables: Aged receivables (e.g., over 90 days) raise concerns about the collectability of previously recognized revenue. This can overstate earnings and create doubt about the sustainability of revenue streams.
- Revenue Timing: Recognizing revenue prematurely, without ensuring payment is likely, inflates earnings artificially. This not only creates a compliance risk but also lowers confidence in reported profits.
Cash Flow Discrepancies
- Disconnect Between Earnings and Cash Flow: High aged receivables can make a company appear profitable on paper while struggling with liquidity. True Value Companies demonstrate a clear alignment between earnings and operational cash flow.
- Collectability Issues: AR aging often signals potential bad debts, undermining the cash flow needed to sustain operations and invest in growth.
Provision for Doubtful Accounts
- Impact on Net Income: Companies must account for uncollectible receivables through bad debt provisions. Underestimating these provisions can inflate earnings, while sudden corrections can lead to earnings volatility—both red flags for investors.
- Earnings Volatility: Inconsistent financial management can cause wild swings in net income, deterring potential buyers or investors.
Sustainability of Revenue Growth
- Credit Policy Insights: Generous or poorly enforced payment terms may boost short-term revenue but often lead to cash flow issues and unsustainable growth. A True Value Company ensures payment terms are balanced with the company’s cash flow needs.
Customer Concentration Risks
- Dependence on Key Clients: If aged receivables are tied to a few customers, the business risks over-reliance on concentrated revenue streams, lowering diversification and stability.
Potential Red Flags for Earnings Management
- Manipulation of Metrics: Companies might loosen credit policies or recognize revenue prematurely to hit earnings targets. Such practices degrade the QoE and raise questions about the company’s integrity.

The Role of MSAs and Internal Policies in AR Management

To address AR challenges and build a True Value Company, businesses must focus on creating robust agreements and internal policies that align with long-term value creation. This involves structuring MSAs with clear payment terms, interest provisions for late payments, and mechanisms to incentivize timely payments, while ensuring these terms integrate seamlessly with the company’s cash flow cycle. Internally, companies need policies that streamline invoicing, automate follow-ups, and establish escalation processes for overdue accounts. Regular AR reviews are also critical to identify trends, address problem accounts, and refine credit terms for clients with consistent delays. By addressing these areas strategically, businesses can lay the groundwork for sustainable growth and financial stability, turning potential risks into opportunities for value enhancement.

Why It Matters: Creating Value for Investors and Buyers

Potential investors and buyers are not just looking at your revenue—they’re analyzing how well you manage and sustain it. A high level of aged receivables can:

Decrease your company’s valuation.
Increase perceived risk.
Suggest operational inefficiencies.

On the other hand, a company with minimal aged receivables demonstrates strong financial controls, reliable cash flow, and sustainable revenue—hallmarks of a True Value Company.

Ready to Become a True Value Company?

At GNS Law, we exist to help businesses become True Value Companies—organizations built to maximize their sale price when the time comes to sell. A True Value Company stands out for its strong foundations, reliable earnings, and premium valuations, attracting buyers who see the full potential and stability in its operations. AR management is a critical component of this journey, ensuring that your company’s financial health reflects its true worth. Our legal strategists specialize in drafting robust MSAs and implementing strategic internal policies designed to protect and enhance the value of your business.

Let us help you transform your business into a True Value Company. Contact us at info@gnslawpllc.com to explore how proactive legal strategies can prepare your business for a premium exit.

“Working with Gabriela on a complex M&A transaction was a game-changer. Her ability to navigate intricate negotiations and unlock the deal was nothing short of extraordinary. Gabriela’s unparalleled negotiation style, strategic insights, and tireless dedication turned a seemingly stalled situation into a seamless and successful outcome. She not only ensured every detail was addressed but also created an environment where all parties felt confident moving forward. Gabriela was the key to getting the deal done, and I couldn’t recommend her expertise more highly.”

Bob Boulanger, Co-Founder & CFO

Alliance of Independent CFO Consultants

“Parting ways with a business partner is never easy, but having the right legal team by your side makes all the difference. GNS Law was with me every step of the way when I divested my ownership in a private company due to ongoing disagreements with my partners. Navigating such a challenging separation could have easily turned into a major issue, but Gabriela and her team handled the situation with incredible professionalism and care. They were skilled in managing difficult conversations, maintaining our position, and ensuring a successful outcome. I’m especially grateful for their attention to efficiency and cost management, making the entire process both timely and effective. I couldn’t have done it without them.”

Shareholder of Outsourcing Company with Operations

US and LATAM

“Working with GNS Law to set up our nearshore staffing company across the US and Argentina was an incredibly smooth experience. Gabriela and her team were always available, quick to respond, and truly understood the unique challenges of cross-border operations. They made the entire process so easy and efficient, guiding us through every detail and setting up our entity in record time. Their expertise allowed us to hit the ground running with the right legal structure and compliance in place, and we couldn’t be happier with the results. GNS Law was the perfect partner to help us launch and grow our business.”

Diego Oropeza, Founder of Recruxo

Operations in the US and Argentina

“For nearly a decade, GNS Law has been our trusted legal partner, helping us navigate complex business and corporate matters across multiple industries. As Chairman of several companies, including a telecom firm with transactions in Latin America, I’ve relied on their unmatched cultural acumen and legal expertise to close critical deals. Their efficiency and deep understanding of cross-border transactions have been instrumental to our success. GNS Law is our go-to firm, and we couldn’t be more satisfied with their counsel.”

Abid Abedi, Founder and Chairman of Scarlett Wireless,

Managed Staffing, iCode Franchise, and Ascendare.

“For many years, GNS Law has been our go-to law firm for a wide range of business legal matters. As an international services company working with U.S. Fortune 500 companies and other major organizations across various industries, we’ve relied on their expertise to navigate complex corporate and business issues in dynamic local and international environments. Gabriela’s tenacity and bicultural background have been invaluable in supporting our business efforts, particularly in relation to our ventures in Latin America. Her deep understanding of both the legal and cultural nuances has made a real difference in the success of our endeavors.”

Azam Mirza, Co-Founder and former President at Akorbi,

former President at RunMy Process.

“As a minority-owned company, we’ve greatly appreciated GNS Law’s exceptional legal support. Their responsiveness and the sense of security they provide are exactly what I need as a CEO running a fast-growth company. We’ve relied on their expertise for a range of projects, including some complex corporate matters, and their guidance has always been clear and reliable. I highly recommend GNS Law to any business looking for a dependable legal partner—they’ve been an invaluable asset to our company.”

Female CEO of DFW-based national advisory and learning services company

“GNS Law has been with us from the moment we entered the U.S. market. While we are a large operation in our home country, navigating the U.S. was entirely new for us. Gabriela and her team helped us establish our legal entity, set up contracts, and build the right legal structures for hiring and expansion. Their legal strategies have been crucial to our growth, and we couldn’t be more pleased with the partnership. Their bilingual and bicultural approach has made a significant difference for our primarily Spanish-speaking team, and we highly recommend GNS Law to any company seeking trusted legal counsel.”

Kibernum

Operations in LATAM and the U.S.

“ Gabriela is very responsive and goes the extra mile in getting work done timely. Gabriela and her associates are thorough and very organized. We have used them on several small projects relating to organizational documents and letters, but we were also very pleased with a recent sale transaction Gabriela advised us on that took a lot of review and updating in a compressed timeframe. We were successful in getting the sale documents in order, and highly recommend this firm for corporate work. ”

Leslie Pelley Emerson, CPA

Corporate Controller Ascendare

“ When we were looking for an international lawyer in the United States, we were told to reach out to Gabriela Smith. Gabriela very quickly and diligently started working on our international negotiation, and she achieved the outcome we wanted. Working with Gabriela turned a very difficult situation into a simpler deal. We recommend Gabriela. / Cuando buscabamos un abogado internacional en Estados Unidos, nos recomendaron a Gabriela Smith. Gabriela inmediata y diligentemente represento a nuestra empresa en una negociacion internacional y logro el resultado que buscabamos en el caso. Trabajar con Gabriela hizo que una situacion dificil se vuelva en un problema menos para nosotros. We recommend Gabriela. ”

Luis A. Natella, Manager

VMC Refrigeracion S.A., (Argentina)

“ We have been working with Gabriela for the last year and she has been really helpful in
helping us coordinate and organize the global structure of our companies and with international compliance matters by being proactive, responsive and fully dedicated. ”

CEO of International Technology Company

with offices in North America, South America and Europe

“ I own a minority certified small business and was looking for an attorney who was not only an expert in their field, but also someone who genuinely cared about my small business. I found Gabriela and was thrilled that they represent big and small companies and give them all the attention they deserve. Gabriela helped my business with the first agreements that we signed for some big projects. We are thankful for their commitment to us and recommend their services. ”

CEO and Founder

Dallas Logistics and Fuel Family Owned Company

“ Gabriela no es un estudio jurídico más. Es un grupo de abogados dinámicos y que realmente entiende sobre negocios y las prioridades de los ejecutivos de empresas. Se hacen parte de la empresa y le ponen sumo interés a los asuntos y al éxito de sus clientes. Gabriela es de confianza y es nuestro abogado de referencia desde hace muchos años.

Gabriela is not just another law firm. It is a group of dynamic lawyers who have a profound understanding of business and of the priorities of seasoned executives. They become a part of the team and pay close attention to the matters they handle and care about client success. We trust Gabriela and they have been our law firm for several years ”

CEO of International Software Company

with offices in North and South America

“ Gabriela le suma a su know-how y comprensión de los negocios en Estados Unidos y América Latina, una clara vocación de servicio demostrada en su alta disponibilidad y profesionalismo. Por lo cual interactuar con ella se hace muy sencillo. Recomiendo a Gabriela Smith para asuntos cross-border de alta complejidad.

In addition to her know-how and the added value of understanding business in the United States and Latin America, Gabriela loves to serve her clients, which is something she has demonstrated in her ability to respond quickly and in her professionalism. Thus, it is very easy to interact with her. I recommend Gabriela Smith for complex cross-border matters. ”

Carlos Anino, CEO

Synthesis Retail Solutions

“ Gabriela was recommended to us by EHR industry leaders. Gabriela is our go-to attorney for complex software licensing deals and has successfully drafted and negotiated these deals. She is extremely responsive and diligent with our requests and has profound knowledge and understanding of our industry. She takes the time to understand what we need and really cares about our work, products, and services. ”

Preston James

CEO, Strateq Health

“ Gabriela es uno de mis proveedores preferidos. La confianza de poder delegar tareas o consultas especificas en un outside counsel sabiendo que todo se va a ejecutar y resolver de manera eficiente, rápida y con un nivel de calidad first class, es fundamental para un área de legales interno. El nivel de personalización en la atención por parte de sus profesionales, y la agilidad para trabajar ajustado a los procesos internos de nuestra compañía ha sido un agregado de valor enorme para las operaciones del área que dirijo. Definitivamente un asset valioso

Gabriela is one of my favorite providers. The trust generated in being able to delegate tasks or specific consultations to an outside counsel knowing that everything will get done and resolved in an efficient and timely manner, and with “first class,” is fundamental for an in-house attorney. The level of personalization in the performance of work by these attorneys, and the agility to work while also adjusting to our company’s internal process has been an added-value to the work I perform. Gabriela is definitely a valuable asset. ”

Fernando Valdemoros

Legal Director, Belatrix

“ CMP has worked with Gabriela for five years on a variety of corporate legal issues – from acquisition and contract to Human Resource issues. We have always found them to be responsive, professional and provide pragmatic and insightful legal advice. Their legal services are the best I have experienced. I highly recommend Gabriela. ”