Receivables factoring

The move. The company needs cash but doesn't want to show debt or weak collections. So it turns future operating inflows into today's CFO by selling them (receivables factoring or securitization). Or it turns what is economically a bank loan into a line that never touches CFF (supplier finance). At the fraudulent extreme, it routes plain borrowings through operating accounts.

The plumbing. Watch the journal entries do the work. A company holds ₹100 crore of receivables, and there are two ways to raise cash against them:

Borrow against them (honest label):

Dr Cash                       95
    Cr Short-term borrowings      95      → inflow reported in CFF; receivables stay; DSO honest

Sell them ("true sale" / non-recourse factoring):

Dr Cash                       95
Dr Loss on sale (fee)          5
    Cr Trade receivables         100     → inflow reported in CFO; receivables vanish; DSO plunges

Same cash, same economics, since future customer payments now belong to a financier either way. But the second version reports higher CFO, lower receivables, better DSO and no debt. Accounting standards police the boundary. Under US GAAP (ASC 860) a transfer counts as a sale when the transferor surrenders control. Under IFRS 9 / Ind AS 109, derecognition requires transferring substantially all risks and rewards. With-recourse factoring, where you still bear the default risk, stays on the balance sheet as a borrowing. Non-recourse factoring comes off. So managements engineer the paperwork to hit "non-recourse," sometimes with side letters and first-loss guarantees that keep the risk right where it was. That's why you hunt the disclosures and don't trust the label.

Why it distorts three things at once. (1) CFO gets a boost equal to the growth in the sold balance during the year. Sell ₹60 crore that's still outstanding at year-end, which you hadn't sold before, and CFO is ₹60 crore higher than the business produced. (2) DSO falls, defeating your receivables tests just when you need them. (3) Leverage is understated, because the financier's claim is real but appears in no debt line. One move fools the earnings-game test (DSO), the cash test (CFO) and the solvency test (net debt) all at once. It's an elegant trick, which is a good reason to make financing inflow dressed as operating the first family we teach.

The analyst's adjustment (memorize this pair):

Adjusted receivables = reported receivables + sold/factored balance outstanding
Adjusted DSO         = adjusted receivables / revenue × 365
Adjusted CFO         = reported CFO − Δ(sold balance outstanding)     [treat the sale as borrowing]
Adjusted net debt    = reported net debt + sold balance outstanding

The CFO adjustment uses the change in the sold balance, not the level. A stable ₹60 crore program flatters the balance sheet every day, but it boosts CFO only in the year it was built, and it drains CFO in the year it unwinds. Worked Example 1 walks a four-year arc (build, plateau, unwind) so you can see the cliff coming.

Securitization is factoring at industrial scale. Pools of receivables (credit-card balances, auto loans, trade receivables) are sold to a special-purpose vehicle that issues securities against them. Assignment and pass-through-certificate (PTC) transactions are a normal, regulated funding tool for an NBFC or bank in India. The analytical sin is in the trend. An issuer that suddenly leans on securitization late in the year, or whose "de-recognised assets" note balloons, is manufacturing CFO and fee income out of future interest. For a non-financial company, any material receivables securitization deserves the full adjustment above. India adds a corporate cousin, channel financing. A bank pays the company at once for invoices on its dealers, and the dealers owe the bank. Sales look instantly collected. So ask one question: who eats a dealer default? If the company gives the bank a first-loss deficiency guarantee (FLDG), the risk never left. Hunt for it in contingent liabilities and the related-party note.

Supplier finance / reverse factoring: the payable that is secretly a loan. Here's how it works. The company's bank pays its suppliers early, say on day 30, minus a small discount. The company repays the bank much later, on day 120 to 180. The company's obligation now runs to a bank, so economically it's a short-term borrowing. But if the terms are judged not "substantially modified," it stays inside trade payables, and the cash-flow statement shows operating flows where financing ones belong. The effects: DPO stretches enormously, CFO inflates while the program grows, and net debt is understated by the full program balance. The structure hid in plain sight for years because no disclosure was required. That changed after the failures. ASU 2022-04 (US GAAP, effective for fiscal years beginning after 15 December 2022) forces disclosure of program terms and outstanding obligations, with a roll-forward a year later. The IAS 7 / IFRS 7 amendments "Supplier Finance Arrangements" (effective 1 January 2024) do the same under IFRS. Ind AS typically adopts such amendments with a lag. So for Indian companies you still hunt the debt note, the payables ageing and the acceptances line. Acceptances are bank-accepted bills inside trade payables, the classic Indian quasi-debt residue. Several leveraged Indian industrials carried enormous acceptances balances on their way into insolvency.

The adjustment mirrors factoring. Move the program balance out of trade payables and into debt. Recompute net debt/EBITDA and interest cover. Then subtract the program's growth from CFO to see the organic figure.

On the record.

• Delphi (US, 2006 SEC action). The SEC alleged that in Q4 2000 the auto-parts maker "sold" $200m of metals inventory to a bank and a consulting firm while agreeing to buy it back in the next quarter. These were disguised financings, booked to flatter operating results, and Delphi settled. So a financing inflow can be dressed as operating with no receivable involved at all. Anything "sold" under a repurchase understanding is a loan in costume.
• Enron (US). The bankruptcy examiner and a Senate subcommittee detailed Enron's "prepay" transactions with major banks. Billions of what were economically loans went through commodity trades so the inflows landed in CFO. Enron's reported operating cash flow, the number the bulls pointed to, was substantially borrowed.
• Carillion (UK, collapsed January 2018). The construction group's "early payment facility," reverse factoring of roughly £0.4 to 0.5bn, sat outside reported borrowings. Rating agencies and the parliamentary inquiry concluded it functioned as hidden debt, and adjusted leverage was multiples of the reported figure. The UK MPs' report supplied the epitaph: aggressive accounting masking a deteriorating business.
• NMC Health (UK/UAE, 2020). After a short-seller report, administrators uncovered over $4bn of undisclosed debt, much of it routed through supply-chain-finance structures. The equity was wiped out. Supplier finance's opacity was the mechanism, and it's the reason the new disclosure rules exist.
• India, Cox & Kings (2019). The travel company reported healthy profits and hundreds of crores of cash and receivables, then defaulted on commercial paper within months. Later forensic audits and enforcement actions alleged fictitious debtors and diverted funds (litigation ongoing; treat as allegations). Here's the lesson that lasts. Its cash conversion had been chronically poor for years, with profits that never became distributable cash, and the market ignored it because the P&L looked fine. Profit is an opinion. Unexplained non-conversion is a warning, and you now know how to compute it.