Working capital and acid test - include deferred?

As a manufacturing company, we carry significant amounts of deferred revenue - how to include?

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As a manufacturing company, we run with significant, and variable, amounts of deferred revenue.

I am unsure whether I should include these in a working capital type calculation.

Yes, they are not sales/purchase ledgers, cash, stock etc - but represent future liabilities to do some work.

If you compare two timeframes, one with deferred revenue in it and the other without, then on balance whilst you are holding deferred revenue you are 'worse off' than if you didn't have it in a way.

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RLI
By lionofludesch
01st Jul 2019 17:11

There's no one-size-fits-all answer.

But on balance, I'd include them as liabilities for management purposes. I might discount them to some extent if they were non-refundable but, as you say, they do represent a future obligation to do work.

The other way would be to provide for the cost of doing the work but that's a bit messy and probably not any more helpful.

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Replying to lionofludesch:
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By tom123
02nd Jul 2019 09:05

Thanks.

As we are likely to be experiencing more variability in the coming months, the effect is more pronounced.

I think I will include them as part of the total working capital.

They are, of course, in the full balance sheet each month, but I am trying to pick out key figures for monitoring given these uncertain times we are in.

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By trecar
04th Jul 2019 10:39

I personally would be inclined to include it under the prudence convention. Better to disclose all than have it come back and bite later on. Also those reading the report will have in it black and white that there are commitments that will impact future cash flows.

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paddle steamer
By DJKL
27th Apr 2020 09:24

Where are the debits would be my thought?

You are counting within assets the debits relating to said deferred revenue, you would not have sales to adjust to being deferred if you had not debited SLCA and credited sales in the first place, and within the ratio you are counting said SLCA, or the cash it has become, so it seems to me appropriate to count said liabilities you have recognised.

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Replying to DJKL:
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By tom123
27th Apr 2020 10:04

Interestingly this query from last year has come to life again!

I went with a cash flow style report, starting from profit, adding back depreciation, then movements in current assets and current liabilities, ending in movement in cash.

What is really interesting is how dramatically the cash and profits move in opposite directions month to month.

Deferred revenue (which will sometimes be months in advance) really exaggerates the usual debtor / creditor lags you would usually have.

One of our most recent profitable years was also a huge cash drain.

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Replying to tom123:
paddle steamer
By DJKL
27th Apr 2020 10:24

Had not noticed earlier dates, sorry.

Possible touch of overtrading springs to mind.

I am a cash focused person , profit and loss accounts are mere score keeping at year end,but we tend to have little in the way of short term debtors/creditors so monitoring cash is really everything. I look at all the banks every morning, track who has paid and the rest drops into place.

The great advantage is I note each day's figure down in my office diary at the front (year to view with a box for each day) so can see the monthly/ quarterly/ annual trends just by looking at these pages, bank repayments go out same day each month, dividends are similar, wages also and we barely have any invoice creditors these days as I pay weekly and unless disputes pay everything.

If you can cope with the banks/are not too heavily geared then property investment is one of the simplest business types to model forecasts where reality matches these forecasts. (That is why we sometimes used to do scary building/development projects, liven things up a bit, inject some uncertainty to avoid falling asleep)

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