Factoring Companies Guidebook

Stock Cleansing

Definition

Stock Cleansing is sometimes considered the same as, or inter-changeable with, Stock Rotation. However, it is distinguished in this case as referring to the removal of competitors stock from the shelves of future customers in order to gain business.

Concerns

In order to gain access to new customers, Clients are sometimes required as a pre-requisite, to remove competitors stock from the potential customer's shelves. Not only is the Client required to cover the cost of the physical removal of stock, but they must also pay the customer the value of the stock removed. The Client is effectively 'buying the business'.

The expense obviously has an effect on bottom-line profitability; until such time as the anticipated increase in turnover, assuming the right margins are obtained, work back through.

Of more immediate concern to us is the method of reimbursement to the customer. It may be dealt with by a cash payment, but could equally be handled by a contra on the sales ledger debt, the issuance of credit notes, or the customer taking debit notes. Each of the last three items impact on our ability to recover the book debts, due to the erosions

The customer's ability to demand this of a Client and achieve its objectives, is indicative of their power and suggests the Client will be working to the customer's terms and conditions rather than their own. If the customer can achieve such things in one area, they are likely to achieve it in others, which may also have an impact on the book debt security.

Identification

Review major debtor's terms and conditions of purchase.

Enquire of the Client as to whether they are seeking new customers, who they are and any pre-conditions.

Consider the nature of the Client's business and its customer base.

Review the purchase ledger for any potential contras.

Examine the Management Accounts for accruals for 'marketing' or promotional contributions, which relate to specific customers rather than more general marketing expenditure and quantify its extent.