SitePoint Sponsor

User Tag List

Results 1 to 5 of 5
  1. #1
    ********* Callithumpian silver trophy freakysid's Avatar
    Join Date
    Jun 2000
    Location
    Sydney, Australia
    Posts
    3,798
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)

    Bad & Doubtful Debts

    Hello Earthlings,

    I am researching/negotiating what is fast becoming an overly complicated business arrangement. I now need to come up with some sort of idea in my head as to what level of bad and doubtful debts it would be reasonable to expect for a web site which has a very broad viewership. Lets assume traffic of 500,000 unique visits per day. The site owners will be administering the advertising strategy themselves. That is (and I don't know if this makes sense because I don't really know much about this end of the industry) the web site owners are not going to outsource advertising to just one network exclusively but will be constantly managing the campaigns they run which could be any type of campaign from affiliate CPA, or CPC, CPM, etc. Thus there will always be a high level of testing going on to determine which campaigns yield greatest return, and to test out the credability of the actual network, agency or advertiser too, in terms of them paying their bill and keeping accurate stats.

    With all that said, here is my question again. What would be a rough level of contingency to make for ongoing bad and doubtful debts from such a web site. See, the business negotiations have gotten down to having to consider these sorts of details, which is a bit of a nightmare, because the business partners want to use and accrual based accounting method to calculate revenues. Therefor, say in the month of September, the business books show that the business has, on paper generated $500 revenue from advertising, affiliate promotion, etc. How much of that money is likely to get into the bank account - ie, how much of that is likely to be realised. Therefor, how much of that on paper revenue do I have to offset with an allowance for bad and doubtful debts?

    I know this is a complicated question, and I am trying to persuade the party I am negotiating with to use a current account (cash) basis for calculating earnings. Maybe you guys can share some experience that will help me explain things a little better to the other party.

  2. #2
    SitePoint Wizard Lil_Red's Avatar
    Join Date
    Jul 2001
    Posts
    3,400
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    For a privately held company, cash basis is easier. Basically in the cash basis scenario, you only account for money you receive. You pay taxes on this money, etc. You don't have to worry about accounting for bad debt since you're only interested in the actual money received.

    Accrual basis is a more complicated way of doing the same thing. The reason people want accrual basis is it makes them look good to the shareholders. For example, the salesperson trades 1000 banner impressions with another company and comes up with a dollar value for those impressions. He then says to his boss - look I sold $10,000 worth of advertising which is dutifully recorded on the books. Looks good on paper but since it's a banner swap, the company will never actually see the money.

    Based on our 4 years of running advertising on the internet, we have had less than 1% not pay us what was owed.

  3. #3
    busy Steelsun's Avatar
    Join Date
    Mar 2001
    Location
    Houston, Tejas; Future Capital of the World
    Posts
    2,474
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    These are the kinds of questions and problems that have been plaguing CPAs, Attorneys, Net Businesses, and the IRS in general for the last few years.

    There is a common practice of saying a company earned, for example, $10000 in ad revenue in one year, yet most of that 'revenue' is not cash, but impression trades. Both the IRS and SEC have been going after companies that are inflating revenues in this manner.
    Brian Poirier
    SunStockPhoto: Stock Photos, Fine Art Photos, Event Photography

  4. #4
    SitePoint Wizard silver trophy
    beley's Avatar
    Join Date
    May 2001
    Location
    LaGrange, Georgia
    Posts
    6,117
    Mentioned
    3 Post(s)
    Tagged
    0 Thread(s)
    Actually, accrural based accounting is good for several reasons.

    1. Almost every company uses it... it's almost standard.
    2. It allows you to see WHEN you sold X... not just when you got paid for it.
    3. It lets you more accurately calculate fiscal earnings because you account for the money you might not receive until next month (which could be the first month of the next fiscal year)
    4. For statistical purposes, you have both - statistics on what was SOLD and what was PAID for.

    I'm sure there are other plusses, just can't remember those accounting classes right now!

  5. #5
    SitePoint Wizard Lil_Red's Avatar
    Join Date
    Jul 2001
    Posts
    3,400
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    I don't know if I would call accrual basis a standard. I'd say it's about 50/50. About half the companies I've worked for have used cash basis and half have used accrual. Companies that are publicly traded are more likely to use accrual.


Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •