Year-End Financial Statements: The Moment of Truth for Working Capital Specialists

The fourth quarter is traditionally dominated by year-end reporting. CFOs and treasury teams are under pressure to optimise key financial metrics and cash flows to protect the company’s interests as effectively as possible. At the same time, it is worth considering the perspectives of key stakeholders: from suppliers who want their invoices settled promptly to bank credit analysts and rating agencies assessing the risk of default. Our colleague Alexander Mutter spoke with leading experts about the levers available for working capital management around year-end. The discussion featured Holger Müller, CFO of AMG Lithium GmbH; Martin Amann, Managing Director and Head of Rating Advisory at LBBW; and Prof. Harald Kessler, Managing Director of KLS Accounting & Valuation GmbH.

The Levers of Smart Cash Flow Management: Keeping Supplier Relationships in Focus

For treasury professionals looking to unlock every available opportunity, active cash flow management has become increasingly important. However, before measures can take effect, companies need a clear understanding of their working capital requirements. The underlying factors are often more complex than they initially appear.

Consider supply chain disruptions, for example, which may force companies to maintain higher inventory levels as a buffer against uncertainty. For Holger Müller, CFO of AMG Lithium GmbH, balancing and managing these competing demands is part of everyday business. As a company operating in the chemicals industry, AMG sources raw materials from around the world. Long supply chains and extended shipping times can become even longer in response to external shocks such as pandemics, wars or blocked transport routes, resulting in substantial structural capital tied up in inventory. This is compounded by volatile procurement markets, as many raw materials are scarce and subject to global market prices.

Add investments in new production capacity to support future growth, and a considerable proportion of a company’s liquidity can quickly become tied up. At this point, treasury teams need to act and identify opportunities for optimisation. Year-end is a particularly important moment to review whether liquidity and leverage ratio targets are being met and financial covenants are being maintained.

Accounts payable are a key area of focus. Extending payment terms is a classic way to release additional liquidity or retain access to cash for longer so it can be deployed elsewhere. However, negotiating extended terms with every supplier individually quickly reaches its limits, particularly in already strained supply chains.

For CFOs, forecasting over a three-month horizon is often challenging, making short-term tools and instruments essential. cflox pay, our digital payment solution for working capital optimisation, addresses this challenge by extending payment terms. It can provide liquidity independently and at short notice, increasing financial flexibility. Challenges such as high structural capital requirements caused by complex supply chains or volatile procurement markets can be addressed without disrupting existing processes. Improving the cash conversion cycle can increase free cash flow and strengthen the liquidity position. At the same time, supply chain processes remain straightforward because individual supplier onboarding is not required.

AMG Lithium GmbH adopted cflox pay with precisely these objectives in mind: increasing free cash flow and shortening the cash conversion cycle. Extended payment terms were intended to offset the additional liquidity requirements arising from higher inventory levels, reflected in Days Inventory Outstanding (DIO), while ensuring that the payments remained classified within operating rather than financing cash flow.

Equally important to Müller were a streamlined implementation without a special-purpose vehicle, additional financing flexibility as raw material prices increased, and the ability to finance liabilities in US dollars.

“The supplier doesn’t notice a thing,” Müller explains. Payments continue to run through the company’s regular payment process in its ERP system. As the payment service provider, cflox settles the invoice with the supplier and finances the 60-day extension of the payment term through its funding arrangements with financial institutions. Once the additional 60 days have elapsed, AMG settles its liability with cflox. The result is simpler processes and greater financial flexibility.

Accounting for Supply Chain Finance: What Companies Need to Consider Now

Extending supplier payment terms is one of the fastest ways to generate liquidity ahead of reporting dates, particularly at year-end. Whether this improvement is reflected in key financial metrics depends on the accounting treatment.

Prof. Dr Harald Kessler emphasises: “The decisive question is whether a newly incurred liability qualifies as an operating liability or a financial liability. This determines free cash flow and leverage, and therefore indirectly affects the company’s credit rating.”

The distinction is less restrictive than many companies assume. An operating liability must be similar to trade payables in terms of its function and nature. It must be an integral part of working capital management, with only a moderate extension of the payment term, no additional collateral and no change in currency.

“If the maturity of liabilities arising from working capital management is not significantly longer than that of the original supplier liabilities, one essential condition for presenting them together is met,” Kessler explains.

Payment solutions such as cflox pay that meet these conditions can therefore generally be reported as “other liabilities” and reflected in operating cash flow.

The introduction of IFRS 18 makes the situation less clear-cut, as the standard setter has withdrawn the interpretative guidance that previously served as a key reference point. Nevertheless, Kessler cautions against unnecessary alarm. In his view, the cflox model has “very, very good prospects” of continuing to be presented in financial statements in the same way as before.

Companies now need to evaluate their options carefully. The starting point should be the underlying business decision, followed by the accounting treatment. “You shouldn’t put the cart before the horse,” Kessler says.

Companies considering such an instrument should document their rationale in an accounting memorandum at an early stage and proactively engage with their auditor. “You need to prepare a sound argument in advance and present the auditor with a solution that is easy to understand and justify.”

After all, accounting is not about finding “the one and only correct presentation”, but about arriving at a defensible accounting treatment.

This decision also influences how banks and rating agencies assess the instrument.

The Rating Experts’ Perspective: When Can Extended Payment Terms Improve a Credit Rating?

Extended payment terms improve liquidity. But how does using cflox pay affect ratings assigned by banks and external rating agencies?

Martin Amann classifies working capital solutions as financing instruments. “For us, it is a more or less neutral instrument, with the advantage that it generates additional liquidity.”

In internal bank ratings, the effect is primarily positive when the company uses the released liquidity to repay financial debt. This can lead to a noticeable improvement in leverage ratios. Amann therefore describes working capital financing as “an accepted and widely used instrument” for improving financial metrics and credit ratings.

This brings us back to Kessler’s comments on accounting treatment: “The accounting classification is the starting point for the analysis.” If the liability is classified as financial debt, “there would be no improvement”.

The extent to which a company benefits from working capital solutions in its credit rating depends primarily on two factors: the accounting classification and the reliability of the programme.

“To ensure that the impact is neutral or positive, external rating agencies assume that a programme will continue over the long term, including at a consistent scale,” Amann emphasises. Working capital instruments should therefore ideally be established as a permanent part of the company’s financing strategy rather than used as a one-off measure at year-end.

Amann’s advice for year-end reporting is clear: “Focus on cash flow, specifically operating cash flow, which you can influence.”

Short-term working capital optimisation can improve precisely the metrics that banks and rating agencies scrutinise at the reporting date.

Conclusion: Make the Right Decisions Before the Reporting Date

Extended payment terms deliver the greatest benefits when they can be implemented quickly, the operating nature of the liability is maintained for accounting purposes, and the programme is designed for the long term.

Companies that address these three points before the reporting date can turn year-end reporting into a real opportunity for working capital specialists.