Lenders typically ask for monthly financial statements, and for ABL structures a monthly borrowing base certificate (“BBC”) with related reporting. Generally, accounts payable is either a single line item on a balance sheet, or a reporting item on a BBC. Because the accounts payable is a liability account most lending structures do not focus on reporting, analyzing, and monitoring accounts payable.
With working capital stresses in 2024, more detailed reporting of accounts payable information should be a requirement lenders add to the deliverables required of a borrower. Why? Because borrowers often use accounts payable as the balancing item in a weakened cash flow environment. Before lenders are aware of the accounts payable situation, the outstanding balance can grow to 90 days of vendor costs and vendors could have a borrower on credit hold. All this could happen while the ABL structure is otherwise in compliance.
Examining the accounts payable aging should include:
Is the aging based on invoice date or due date?
What are the terms offered by vendors? What are credit lines available by vendors?
How are COD payments reported?
Which vendors are on COD terms?
How are prepayments accounted for?
By account? In total in a separate line item?
How are overpayments reported?
By account? In total in a separate line item?
Is a cross aging with accounts receivable prepared?
When cash flow is stressed, companies often look to their lender for additional debt, which is using the line of credit as the balancing item. If the line of credit is not an available funding source, then the balancing item becomes accounts payable.
Lenders do not want to be surprised by excessive accounts payable balances as that puts additional pressure on recovery strategies a struggling company needs to implement to return to positive cash flow. A company only has one chance to use accounts payable management to fund a recovery strategy. When that opportunity is squandered, the recovery strategy pivots to having to be solved by equity or by the lender.
Working capital management is a key focus in today’s interest rate environment. Companies cannot afford to increase debt levels at these interest rates. The accounts payable management techniques a company uses need to be evaluated by stakeholders, including lenders, to ensure there are no surprises.
Going forward lenders need to pay the same attention to accounts payable as paid to accounts receivable and inventory.