Page 54 - Finance for Non-Financial Managers

Siciliano03.qxd 2/8/2003 6:36 AM Page 35
The Balance Sheet
Long Collection Cycles by Intent
The toy industry is a good example of long collection peri-
ods.Toy stores sell most of their merchandise during the 35
one or two months before the holidays.Yet toy manufacturers space
their manufacturing activities over the entire year and then sell to
their customers under special arrangements that allow the stores to
pay for those purchases after they sell them, which mostly means after
the holidays, perhaps many months after the goods were purchased
and delivered to the stores.This practice is called dating, not in the
boy-meets-girl sense but in the sense of extending the due date for
payment.The sellers that engage in this practice must make sure they
have enough cash or borrowing capacity to operate while they wait
for payment.

made on credit. It’s expected that customers will pay for those
sales within a relatively short time (typically 30 to 60 days), so
they are classified as “current,” even though some customer
accounts may actually be past due.
In some industries, business custom permits a much longer
collection period, sometimes as long as six to nine months or
even more. This practice enables makers of seasonal products
to spread out their manufacturing over most of the year and
induce their customers to take delivery of goods (but not pay
for them) well before they’ll be able to sell them, thus getting
those inventories out of the makers’ warehouses and into their
customers’ warehouses.
Also, during a recession it is not uncommon to find a com-
pany’s customers experiencing cash flow problems that make it
difficult for them to pay promptly. This might result in collection
expectations that go beyond one year, although that will not
usually be apparent from a glance at the balance sheet.
As a manager, you should remember that customers usually
pay later than the terms your company may have granted them
originally. The national average is estimated at about 45 days in
normal economic times, longer than the customary 30-day
terms printed on most invoices from their suppliers. So you
can’t always count on customers to pay their balances on time.