Channel stuffing

Q What does “stuffing the channel” mean? — P.D., Mansfield, Ohio

A If a company inflates its sales numbers by shipping more products than can be sold through its distribution channels, it’s stuffing the channel.

Companies often record sales as soon as they ship products, so shipping goods ahead of schedule makes it seem that business is booming. This can result in many unsold products being returned to the manufacturer, so sales that were already claimed never actually occur. This is an illegal way for companies to “cook the books,” and some executives have gone to prison for it.

When a company’s accounts receivable are growing faster than sales, that indicates possible channel stuffing. One way to check for it is to calculate a company’s “days sales outstanding” (DSO): Divide accounts receivable by sales (sometimes referred to as revenue), and then multiply the result by the number of days in the period (often 91 for a quarter, or 365 for a year). This reveals how many days’ worth of sales are represented by the current accounts receivable. Between 30 and 45 days is typical.

A company with a low DSO is getting its cash back quickly and, ideally, putting it immediately to use, getting an edge on its competition. Rising numbers can signify channel stuffing. This doesn’t work in every industry, though: Cash-based businesses such as restaurants, for example, don’t usually have much in the way of receivables.

Q What’s a “block trade”? — A.K., Fort Myers, Florida

A Block trades are large orders to buy or sell stocks or bonds at a price agreed upon by two parties, such as hedge funds or pension funds. They typically involve at least 10,000 shares of stock or $200,000 worth of bonds.