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.
|GM Financial Receivables||$40,568||$12,276||$52,844|
|Less: allowance for loan losses||(844)||(67)||(911)|
|GM Financial Receivables, net||$39,724||$12,209||$51,933|
But that doesn’t explain everything
GM’s retail receivables also increased by about 25%. In fact, if you look specifically at GM’s retail receivables, you’ll see that the percentage estimated to be uncollectible went from 2.7% in 2017 to 2.1% in 2018.
|GM Financial Receivables||$32,714||$9,957||$42,671|
|Less: allowance for loan losses||(889)||(53)||(942)|
|GM Financial Receivables, net||$31,825||$9,904||$41,729|
Thus, the amount of car loans went up, but the amount expected to be uncollectible went down.
This matters not just for the Balance Sheet – where the allowance for uncollectible accounts affects total assets – but for the Income Statement as well. GM recorded $642 million in bad debt expense in 2018, compared to $757 million in 2017.
The lower bad debt expense boosted GM’s operating profit.
This brings us back to our initial question:
|For the Years Ended December 31||2018||2017||2016|
|Allowance for loan losses at beginning of period||$942||$805||$749|
|Provision for loan losses||642||757||644|
|Effect of foreign currancy||(10)||1||7|
|Allowance for loan losses at end of period||$911||$942||$805|
Why did GM reduce its allowance for uncollectible accounts when accounts receivable increased?
One legitimate explanation would be that GM’s receivables became less risky in 2018 compared to 2017. To understand whether this is true, we can examine the percentage of customers who fail to make timely payments on their car loans.
Fortunately, GM discloses the percent of retail receivables that are more than 30 days past due. This figure was 5.8% in 2017, but it declined to 4.7% in 2018. This is significant, as it means a higher percentage of GM’s customers were making their payments in 2018. This could also explain why the amount of receivables went up while the estimated bad debt went down.
If you want to dive deeper into this mystery, check out the change in the delinquent payment rate for Ford, Toyota, and other automotive companies. I’d love to hear what you find.