General Motors’ accounts receivable increased from $43 to $53 billion between 2017 and 2018, yet GM’s allowance for doubtful accounts actually decreased over the same time period.
One explanation is that GM underestimated its bad debt to increase its profit.
To answer this question, let’s look more closely at GM’s receivables. First, note that GM has two types of receivables:
1. Retail receivables
Retail receivables are loans made to consumers so they can purchase a GM vehicle.
2. Commercial receivables
Commercial receivables are loans made to GM dealers so they can purchase inventory (vehicles).
GM estimates that some of each type of receivable will be uncollectible, but it believes the retail receivables are much more risky. As of 12/31/18, GM estimated that 2.1% of its retail receivables would not be collected, compared to just 0.5% of its commercial receivables. This partly explains why GM’s total receivables increased while the allowance for bad debt decreased – there was a 23% increase in the lower-risk commercial receivables.