Binx, typically, when "historical standards" are well known, they allocate a portion of the receivable to rebates (that is what they call "net of returns and allowances"). So let say that SNDK shipped $1 MM to Circuit City, a rational arrangement would be to say that 30% is sold within two weeks of receipt, another 30% during the next two weeks period and the last 40% during another months (reoorder would probably occur once 60% of the good were sold, IMHO). A rational arrangement would be that Circuit City would pay, let say 30% after 45 days (six weeks from shipments) and the other two 30% increments every two weeks after that, leaving 10% unpaid and to allow for "rebates", after a period of let say 3 months of the original shipments, all the coupons are sent to SNDK and the account is "settled". If that would be the case, the true DSO of these retails sales would be exactly 36 days (90% at 30 days and 10% reserve at 90 days). Of course, it is quite possible that when counting sales, the rebates will be discounted in from the beginning. Since SNDK does not recognize sales until Circuit City actually sold, it records those "shelved goods" as inventories (at cost), once sold, it moves (on the books) the goods to revenues (at selling price) and increases its AR by those recognized sales, until it is paid. If you take a "frozen picture" of the books, you will see in AR some sales that were made last week and some that were made three months ago. A good CFO always make sure that his book does not have 90 days accts. receivable, since experience in the industry is that aging accounts (more than 90 days) are not easily "collectible".
My worry, of course, is that the last quarterly indicates a relatively big chunk ($20 MM) that is aged more than 90 days.
Zeev
irrevolute.iuma.com |
