Accounts Payable Financing
Here is an example of how bank financing on accounts payable can boost cash flow from operations.
Sinopharm, a leading PRC pharmaceutical company, had increased its FY2012 borrowings by Rmb 2.2 billion to Rmb 16.1 billion. However, this did not match its cash flow statement, which had the following anomalies.
- Increased borrowings did not increase its cash flow from financing.
- On the other hand, it reported a net use of Rmb 2.7 billion of cash from borrowing activities.
- Trade payables appeared as a Rmb 12.0 billion source of cash.
- Balance of payables increased only Rmb 7.6 billion during the year, even with M&A activity.
It turned out that Sinopharm had an accounts payable financing program with certain banks whereby the bank repaid accounts payables on behalf of the company with an equivalent sum drawn as borrowings. Such a draw-down of borrowings is a non-cash transaction. The Group lowered its reported cash outflow from operations by not paying its supplier directly.
Only when the company repays its borrowings is there financing cash outflow.
“When the bank paid off the payables, there should have been an entry to reduce cash flow from operations that is net off against cash flow from financing,” said Ms Latz.
Sinopharm’s cash flow presentation of this payable financing program enabled it to report positive cash flow from operations in 1HFY2013 and FY2012. Adjustment to account for use of cash for payables would have resulted in negative cash flow from operations.
Exclusion of Interest Paid
Under US GAAP, interest is classified under cash flow from operations. On the other hand, under IFRS, interest may be classified under cashflow from financing. Since cash flow from operations is boosted if a company classifies interest paid as a financing activity, the analyst who is doing peer comparison needs to check that interest is classified in a similar manner.
In the case of food and industrial raw materials trader, Olam, interest and taxes are excluded from Net Operating Cashflow in its investor presentations.
It also presents an adjusted free cashflow figure which is bumped up by readily marketable inventories.
