Two defensible answers, and they are more than a third of a turn apart. The test everybody quotes is asked of a balance larger than the amount everybody reclassifies.
A programme that extends payment terms from 49 to 90 days
for the suppliers behind 60 per cent of purchases releases
66,049,315.07 of cash. Whether that release is a working-capital
improvement or a borrowing depends on how the reclassification test is applied — and the two
readings differ by 0.3740
of a turn of leverage.
The structure, and the two balances inside it
The buyer extends terms. The bank pays the supplier early — on day 10
— at a rate priced on the buyer's credit, and the buyer pays the bank on day
90. Two different amounts are outstanding at any moment, and the distinction
is the whole argument.
What it is
Amount
Annual purchases on the programme
60 per cent of cost of goods sold
588,000,000.00
Payables outstanding at any time
90 days of that flow — what the buyer owes
144,986,301.37
Amount the bank funds at any time
80 days — day 10 to day 90
128,876,712.33
Cash released by the extension
41 days gained on the programme suppliers
66,049,315.07
Days payable outstanding on the group rises from 49 to 73.60, and the cash conversion cycle falls by the same 24.60 days.
The test, and the amount it is asked of
An auditor, a lender or an outside analyst asks three questions. Who does the buyer owe —
the supplier who delivered the goods, or a bank that has bought the invoice and holds the buyer's
irrevocable undertaking? Have the terms been extended beyond what is ordinary for the trade? Does
the bank have recourse to the buyer regardless of any dispute with the supplier?
All three are asked of the amount owed to a bank — which is the
128,876,712.33 the bank funds, not the 66,049,315.07 by which terms moved.
That is why the answer comes in two readings, and the book prints both.
Reading
Added to covenant net debt
Leverage
Against 3.0000×
Extension — the 41 days with the commercial effect of a borrowing
66,049,315.07
2.7622×
0.2378 turns of headroom
Balance — the amount the bank holds, which is what the test asks about
128,876,712.33
3.1362×
breached
Both assume the released cash has been spent. Covenant net debt before either is 398,000,000.00.
On the balance reading the covenant is breached at today's EBITDA: the level
at which 3.0000× would be met is 175,625,570.78,
which is above the 168,000,000.00 the company earns. The programme does not bring a bad
year within reach of the drawstop; on that reading it removes the facility on the day an auditor
re-reads the caption, whatever revenue does. While the release is still held as
accessible cash rather than spent, the extension reading leaves leverage at
2.3690× and the balance reading gives
2.7430×.
The supplier's page of the deck, and its baseline
The programme is sold to suppliers on a saving, and the saving is real — against the new
terms. On the programme the supplier pays 4.20 per cent for
80 days on 588,000,000.00 of flow, which is
5,412,821.92 a year. Funding the same
80 days on its own line at
8.50 per cent costs 10,954,520.55. The difference is
5,541,698.63.
Baseline
Days the supplier funds
Cost a year
Against the programme
On the programme, at 4.20 per cent
80
5,412,821.92
—
Its own funding on the new 90-day terms
80
10,954,520.55
saves 5,541,698.63
Its own funding on the terms it actually has today
39
5,340,328.77
costs 72,493.15
Annual cost = annual flow × rate × days / 365. Applying a period rate to the outstanding stock counts the days twice.
Measured against the 49-day terms the supplier has today,
the programme costs it 72,493.15 a year rather than saving it
anything. The 5,541,698.63 is the saving given the extension the
programme itself imposes. Both figures are true; only one of them is on the slide. The honest sale
is of the 41 days of the buyer's credit the supplier now funds at
4.20 per cent rather than at its own rate.
The risk that is not on either page
The programme is uncommitted. A bank can stop buying receivables in a bad quarter, and
66,049,315.07 of liquidity leaves at the same moment a covenant-conditional revolver
does. Two conditional sources, correlated with each other: on this company, headroom over the
minimum without both is -38,645,596.23.
What to do with this
Before signing, write down which amount the reclassification test would be applied to, and
compute leverage on both. A programme that improves the cash conversion cycle by
24.60 days and might add
0.3932 turns of leverage — or breach the covenant outright — is not
a working-capital tool. It is a financing decision, and it belongs in front of the same people.
The workbook behind this article
Every figure above is a live formula in the companion files for
Treasury Management — the five readings of cash, the liquidity
test, working capital and the discount, and the hedging book. Each file ends with a Checks
sheet setting the printed figure beside the computed one. They are free, and they need no
account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.