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Problem
Client has $2,000,000 of excess inventory that has a cash liquidation value of $700,000.
Solution
Client sells the inventory to Sherwood in exchange for a $2,000,000 trade credit. "Trade Credits" function as cash equivalents whereby one trade credit equals one dollar of cash. The client uses the $2,000,000 trade credit along with $6,000,000 in cash to buy the same $8,000,000 media schedule. That ratio of cash to credit – in this example 75/25 – is called "the blend." The Client’s out-of-pocket net cash is reduced by $2,000,000 – the amount of the trade credit. The media is guaranteed to be the same quality and cost by having the client’s ad agency approve every step. From an accounting standpoint, the client recoups the loss on the inventory while reducing their cash outlay for the media buy by $2,000,000.
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Step1 – Sherwood Buys Inventory |
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Inventory Cost
Liquidation Value
Trade Credits Issued
Gain / (Loss) |
$2,000,000
$700,000
$0
($1,300,000)
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$2,000,000
$700,000
$2,000,000
$1,300,000 |
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Step 2 – Client Uses Trade Credit for Media Buy |
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Media Buy (Net)
Cash Outlay
Trade Credit Used
Net Cost of Media
Gain / (Loss)
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$8,000,000
$8,000,000
$0
$8,000,000
($1,300,000)
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$8,000,000
$6,000,000
$2,000,000
$6,700,000*
$1,300,000 |
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*Media Cash Outlay [$6,000,000] + Liquidation Price [$700,000] = $6,700,000
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Media Offerings
National Cable TV
National Broadcast TV
Network Radio
National Magazines |
Spot TV
Internet
Spot Radio
FSI (Free-standing Insertions)
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