Over at the Three-Letter Monte, the CFA Blog, I have a posting discussing securitization of accounts receivables, and its location within the Statement of Cash Flows. I'm not sure this is a particularly widespread problem, but it may well be a more serious one for certain companies.
Here's the issue. Some companies have gotten into the habit of packaging their receivables and selling them off at some discount to a buyer. You know those ads where Orson Bean asks you why you should have to wait for a settlement or a lottery annuity? Well these companies apparently feel the same way. So they collect the money now from a third party, buy their hambuger, and then pay the third party back next Tuesday when their customers pay them.
Typically, companies will publish a schedule of their receivables, if not how long they're outstanding, then how long they expect them to be. This gives the purchaser some idea of the historical collections record, how long they can expect to take to collect what's outstanding, and how much they might expect to have to write off.
The buyer could take an annuity, some percentage of the receivables over time, or some percentage at the beginning. Any of these arrangements can be considered borrowing at some interest rate. As a result, they should be listed on the statement of cash flows under financing cash flows. But because the revenue is secured by receivables, which are part of operating cash flows, many companies categorize them there.
Now, the notional interest rates some of these companies pay will rise, if they can find buyers at all. Their operating cash flows will shrink, and valuations based on those cash flows will fall substantially. In fact, there's reason to suspect that those companies that place this financing under operations are the ones that are most likely to need the cash.
Next step: find a list of such companies.
