Steroid cash flow: why companies cheat

It seems that every year another top athlete is exposed to doping scandals. But the training that these people have received since childhood believes that the most important thing is their performance, so they will naturally take risks that may increase their chances of winning. Companies that are also taught to perform well at all costs can also exaggerate or artificially “increase” their earnings-this is called cash flow manipulation. Here, we look at how it is done so that you are better prepared to recognize it.

Cash Flow Manipulation: Reasons and Methods

Cash flow is generally considered to be one of the clearer numbers in financial statements.

Companies benefit from strong cash flow, just as athletes benefit from strong muscles-strong cash flow means more attractive and higher ratings. After all, a company that must use financing to raise capital, whether it is debt or equity, cannot sustain it without exhaustion.

The business force that will be injected into cash flow accounting is operating cash flow. It is located in the cash flow statement, after the income statement and balance sheet.

Let’s take a look at some of the most common methods companies use to manipulate cash flow.

Dishonest accounts payable

Companies can add reports by changing the accounting confirmation method for handling outstanding payments or accounts payable. When the company issues a check and sends it out to pay for outstanding payments, the company should deduct the accounts payable. However, although the “check is in the mail,” the cash-manipulating company will not completely honestly deduct the accounts payable and claim the amount in the operating cash flow as cash on hand.

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Companies can also get a huge boost by delaying the issuance of all checks and using overdrafts. However, this increase is the result of how generally accepted accounting principles (GAAP) handle overdrafts: among other things, they allow overdrafts to be consolidated into accounts payable and then added to operating cash flow. This allowance has always been considered a weakness of GAAP, but only before the accounting rules change, you’d better check the numbers and footnotes carefully to spot any such manipulations.

Sales receivables

Another way for a company to increase operating cash flow is to sell its accounts receivable. This is also called securitization. The agent who purchases the accounts receivable pays a certain amount to the company, and the company transfers the right to collect the debt from the customer to the agent.

As a result, the company gets cash from unpaid accounts receivable faster than customers pay cash. The time between sales and collection is shortened, but the company actually receives less money than waiting for customers to pay. Therefore, it does not make sense for a company to sell its accounts receivable just to receive cash early—unless it has cash problems and has reason to cover up the negative performance in the operating cash flow column.

Including non-operating cash

A more subtle steroid is to include cash raised from businesses unrelated to the company’s core business. Non-operating cash is usually funds for securities transactions, or borrowed funds for financing securities transactions, and has nothing to do with business. Short-term investments are usually to protect the value of excess cash before the company is ready and able to use the cash for business operations. These short-term investments may make money, but it is not generated by the power of the core operations of the enterprise.

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Therefore, since cash flow is a measure of the company’s viability, cash from unrelated businesses should be handled separately. Including it will only distort the real cash flow performance of the company’s business activities. GAAP requires clear disclosure of these non-operating cash flows. You can analyze the company’s performance by looking at the company’s cash flow figures in the cash flow statement.

Problematic cost capitalization

It is also a subtle form of stimulant and we have dubious cost capitalization.

This is how capitalization works. The company must spend money to produce the product. Production costs come from net income and therefore from operating cash flow. The company does not bear the expenses all at once, but capitalizes the expenses and creates an asset on the balance sheet so that the expenses can be shared over time. This means that the company can write off costs gradually.

This type of transaction is still recorded as negative cash flow on the cash flow statement, but it should be noted that it is classified as a deduction of investment activity cash flow (not operating cash flow) when recorded. Certain types of expenditures—such as the purchase of long-term manufacturing equipment—do need to be capitalized because they are an investment activity.

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How to identify problematic capitals

If the expenses are normal production expenses, which are part of the company’s operating cash flow performance, then capitalization is problematic. If normal operating expenses are capitalized, they are not recorded as normal production expenses, but as negative cash flows from investment activities. Although the sum of these numbers-operating cash flow and investment cash flow-does remain the same, but operating cash flow appears to be stronger than companies that deduct expenses in a timely manner.

Basically, companies that use this method of capitalizing operating expenses simply shift expenses from one column to another in order to be seen as a company with a strong core operating cash flow. But when a company capitalizes expenses, it cannot hide the truth forever. Today’s expenses will appear in tomorrow’s financial statements, and the stock will suffer the consequences at that time.

Again, reading the footnotes can help expose this suspicious practice.

Bottom line

Whether in sports or finance, people will always try to cheat; only paralyzed supervision can eliminate all opportunities for dishonest competition, and companies need reasonable operating freedom to operate effectively. Not every athlete is using anabolic steroids, just as many companies are honest in their financial statements. In other words, the existence of steroids and dishonest accounting methods means that we must properly review the financial statements of each competitor and each company before accepting it.


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