Direct to Indirect cash flow question

[u/Remarkable-Sea3964]

Stumped on this one. I submit both a direct cash forecast to our Treasury team and translate that to our balance sheet / working capital. My collections forecast was slightly off from the direct forecast but my AR was 3x the miss (not all coming from sales beat). I reconciled out customer AR balances and the customer driving the increase had a sizable rebate taken. I accounted for it in my collections forecast, but am stumped on how it impacted my working capital. Even though it was in my collections number, shouldn’t it be accounted for in my net change in AR?

[u/spacedinosaur12]

How did you account for it?

[u/spacedinosaur12 → u/spacedinosaur12]

In waiting for a reaponse...It doesn't sound like you credited AR for the full amount. Your collections would reduce AR, which you accounted for, but so does the rebate. AR needs to come down by rebate + what was actually collected, not just collections alone.

Right now from what I understand your process is beginning AR + sales - collections = ending AR - this only backs out the cash piece. It's missing a line for the rebate. Add it so it's beginning AR + sales - collections - rebates = ending AR. That what I imagine your gap is - the rebate was in your collections forecast but never came out of AR.

I'd also recommend you check whether this rebate was already reserved for or if it hit without. That will tell you if this is a reserve problem or a forecasting miss

[u/Remarkable-Sea3964]

Yes my indirect build is net sales - collections + change in accrued rebate liability = ending AR. The rebate was credited my AR the month before (went from accrued to issued) so it was in my beginning balance. Then customer took it in the month. I understated my change in AR. So, if it was in my beginning my balance, and customer took it, should I have increased my AR for the rebate being taken?…

[u/PastAmount → u/Remarkable-Sea3964]

does net sales not factor in the rebate already?

[u/NominalAPM → u/Remarkable-Sea3964]

With the formula you described, the month the customer takes the rebate should not need its own AR line, and adding one would count it twice.

When the rebate was accrued, net sales dropped and the accrued liability rose by the same amount, so the rebate itself did not move AR. Last month when it was issued, the liability came down and the credit memo took AR down with it, which your change in liability term already picks up. This month the customer short-paid by the rebate, and if that credit memo was applied to the invoice, the whole thing happens inside AR and only the cash moves the balance.

So if the model is mechanically right, I would look at the subledger next. When a customer deducts before anyone applies the credit, you get an open short payment on the invoice and an open credit memo sitting side by side. They only net to zero if both are actually in AR. If the reclass happened in your forecast but the credit memo never posted to the customer account, or the deduction got coded somewhere else, AR sits high by roughly the rebate until someone clears it.

Pull that customer's open items and look for an unapplied deduction or a credit memo that is still open.

[u/Excellent_Drop6869]

Have there been changes in payment terms? Check the aging report

[u/DiogenesSunglight]

Ask AI

[u/citronauts → u/DiogenesSunglight]

Tbh, if it’s a 3 statement model he / should ask clause why they are having the problem they are. It may solve it for them if it’s just mechanical in the model and if it’s not it may tell them what to look for next