Red Flag 4: If a Company Pumps Out Too Many Goods in a Particular Period

Shipping more products than customers want is a favorite way of boosting revenue and income toward the end of a quarter. The company books all the revenue from the shipments in the period they were dispatched, even though the goods may be gathering dust on the shelves of a warehouse. It may also have offered customers incentives to take the goods, such as discounts or favorable terms for returning the goods if they can’t be sold. The result of this practice, sometimes known as channel stuffing, is either a rapid growth in accounts receivable or lower orders in future quarters—or both. The business is essentially stealing sales from a future period, usually to cover up a shortfall somewhere else.