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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: DownSouth who wrote (30460)	8/25/2000 6:56:22 PM
From: sditto	Read Replies (1) of 54805

I'm not a CPA (although I've worked in a public accounting firm and have the scars to prove it) but I have gone around the block more than a few times with our CFO on accounting for software sales and professional services in a publicly held company. My purpose is not to belabor the point but to help us gain a better understanding of these measurements since cash management is often a very good barometer of how well companies are performing. Revenue and earnings are good but cash is still king. Part of the confusion is different industries and even different sectors within the same industry account for sales and receivables in different ways. In the world of project oriented packaged application software the following definitions hold true: Pipeline - The quantity of sales a company is projecting but has not yet closed. This figure is measured in $ and is often weighted by probability of close. Measurements of the sales pipeline are often given to analysts to provide a sense of future demand and earnings "visibility". Sales - The quantity of sales a company has closed and can recognize as revenue in the current period based on FASB rules. This figure is measured in $. Backlog - The quantity of sales a company has closed but has yet to deliver. This figure is measured in $. Backlog has two components - the amount of work remaining to be delivered in projects already underway plus the amount of projects sold but not yet started. If the time required to meet the latter component of backlog is too high (months) it could negatively impact sales as clients look for sources with faster delivery. Work In Progress (WIP) - The quantity of implementation work which has been delivered but not yet billed. Measured in $ and treated as an asset but not always broken out from A/R on the balance sheet. Accounts Receivable (A/R) - The quantity of implementation work which has been billed but not yet paid. Measured in $ and treated as an asset on the balance sheet. Days Sales Outstanding (DSO) - The number of days it takes on average to collect a single days worth of sales. Typically calculated as (WIP + A/R)/(Sales In A Period/Days In A Period) and measured in days. DSO can go up if the average size of sales is increasing but in general rising DSO or DSO higher than peer or industry norms is bad.

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