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Past Dues and Write-offs
Companies monitor trade receivables by the number of
days outstanding, usually 30, 60, 90, 120, etc. Credit risks vary, but
between 90 and 120 days past due, a receivable becomes impaired. Depending
on the credit, collateral and surrounding issues, by 180 days past due the
receivable should be written down to its net realizable value. Recoveries,
however, may still be possible. This is one of the areas that investors
should monitor.
Manufacturing companies are in a peculiar situation;
often to be competitive, to generate sales (thus profits), they must offer
short-term or long-term financing to their customers. If product financing
is granted without adequate credit review or proper legal documentation,
future unanticipated losses can occur. Many of the telecommunication
equipment companies in the late 1990’s were involved in vendor financing
programs without proper lending expertise; ultimately resulting in major
losses for them and their shareholders.
Keep in mind, that with installment sales, extended
term receivables, loans, leases, and the like, if one payment is over 90
days past due, the whole remaining balance is also credit impaired.
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