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Recommended A/R (receivables) reserve for young company

We're a few million in revenue privately held company that sells both products and services. We're upgrading our accounting policies and procedures and creating an A/R reserve for the first time. Historically we have had very little receivables default. Do we connect our reserve directly to our historic levels or is there some recommended "early company" level we should be using?

Answers

Jerry Goldberg
Title: Principal
Company: Strategic Capital Corp
(Principal, Strategic Capital Corp) |

I would base it off your experience in the past 6-12 mos depending on how long you have had revenues and receivables. As long as you don't immediately intend to increase average per transaction or per customer exposure than maybe a quarter's worth of your three month bad debt experience should be fine. Ramp it as total and per customer revenues rise

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I'm going to go a bit more conservative as you are a young company. Take a look at how your personnel and non-personnel expenses are trending and reserve three months. For a young company, you are most likely beginning relationships with new customers. You may be cutting deals initially. Your customers may delay payments as you are "not in the system" as of yet. Guard your cash flow.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

With little history, I would use what history you do have and evalute if that gives you appropriate coverage on significantly past due accounts. For those past due accounts, if you don't want to "lock in" on using a percentage. establish a specific reserve and migrate to a percentage over time as you become more familiar with your customer/receivable base.

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

I agree with Patrick - specific identification is always the most thorough methodology and the easiest to defend.

Mohammed Saffarini
Title: Financial Controller
Company: Munch Bakery Food Industry
(Financial Controller, Munch Bakery Food Industry) |

I think the best way is to take your history as a percentage form the total sales, then you can apply the same percentage for your current reserve. then you can re-evaluate your percentage for the future depending on the actual for every past year.

Bob Owens
Title: CFO
Company: OTR Wheel Engineering Inc
(CFO, OTR Wheel Engineering Inc) |

Another consideration is reserves are not tax deductible expenses. You have to be careful how much you reduce book income (which financial institutions review for credit checks) while having a much higher taxable income that they many times do not review and you pay income tax based upon.

Steve Kahn
Title: Controller
Company: Carolina Lumber & Supply Co.
(Controller, Carolina Lumber & Supply Co.) |

I think a lot depends on the timing of your reporting -- if you keep a fairly tight reign on your AR, you will have a small population of old items at year end. A month or so later, that members of that old/past due population will have either been paid, written off or highly suspect and therefore need to be included in an allowance. Which generally gives you time to figure the number for your year end reporting. Active AR management is your friend minimizing the need for year end accruals.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

I agree, if you're a small private company, this is more year-end accounting cleanup, and you can look at actuals. It doesn't have much to do with managing your actual collections from customers.

Whether to use a percentage or "specific identification" as noted above is largely dependent on how many customers you have. If you have a few dozen customers with corresponding higher dollar invoices, you should base your reserve on a review of the "story" for each specific customer that has old invoices.

Jim Holloway
Title: CFO
Company: Contract Lumber, Inc.
(CFO, Contract Lumber, Inc.) |

The question of A/R reserves (and inventory shrink reserves if applicable) is always a tough one, especially for a young company. I agree that a conservative approach is the best course. As cash is king and more so for a young company that may not have the necessary established credit lines, this is where you need to place your emphasis. You need to evaluate the larger credits on a specific basis and will need to take a shot at a general reserve based on your customer types and the ability of your personnel to evaluate credit. Remember a collectable A/R is not worth much if you need the cash now and the account, although ultimately collectible, will not pay until later.A good credit manager can be worth their weight in gold.

While the A/R reserve (collect-ability) is definitely a focus, be sure you look at your entire cash flow at this point in your company's existence. You can also guard you cash flow by carefully timing capital purchase, consider paying bonuses based on company performance vs straight salary, arranging for payment terms with suppliers and maintaining close contact with your bank or other source of working capital to be sure they will be there if needed.

Best wishes for your company's success.

Scott Smith
Title: Experienced CFO/Interim CFO
Company: Self-Employed
(Experienced CFO/Interim CFO, Self-Employed) |

Like most posts above, I would suggest basing the initial reserve on what history you do have with your customers with some added judgement about the credit in general of your customer base and the nature of your sales. If you sell revenue in big concentrated chunks to a smaller number of modestly capitalized clients you might want to boost the reserve a bit - just one or two accounts going south will cause more exposure than if you have lots and lots of "nickel and dime" receivables that turn fairly quickly. Then consider adding one more modest cushion on top of that so when you get to year end and are reconciling all of your balance sheet reserves you are more likely to have any "surprise" position by the auditors be a good guy than a bad guy.

Narinder Ahuja
Title: TCE
Company: Agilent Technologies
(TCE, Agilent Technologies) |

For a detailed analysis, take past year history compare for a quarter and make a reserve for next 9 mos, you will change QOQ basis. You will have a very clear data for next year. than you may go for YOY analysis. It will be better to consider your product category for sales:default ratio. That will give you much clear picture.

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