Jason, thank you very much for this thoughtful comment. I very much agree with the substance-over-form principle behind your point: economically similar financing arrangements should not produce materially different leverage, interest-coverage, or cash-flow metrics simply because one is routed through supplier payables rather than conventional debt.
I also agree that standardized reporting of outstanding supply chain finance balances and the associated financing cost would be a major improvement, especially if those amounts were prominent, comparable across firms, and clearly mapped into debt-like obligations and interest-expense-like costs. Your analogy to lease capitalization is very helpful in this respect. The objective should be to reduce the need for ad hoc analyst adjustments by ensuring that economically debt-like obligations are reflected consistently in the metrics investors and lenders actually use.
My concern with the current disclosure approach is that disclosure alone may not be sufficient if the obligations remain outside headline debt classifications, operating cash flow classifications, covenant definitions, and automated analytical tools. Amounts can be visible somewhere in the notes but still fail to affect reported debt, Net Debt/EBITDA, interest coverage, operating cash flow, and working-capital metrics in a comparable way.
The DIO-plus-buffer proposal is intended as an operational benchmark for identifying when supplier-related payment extensions cease to support the physical operating cycle and begin to function as general liquidity. I agree that it is a proxy, and any such benchmark would need to be applied with industry context. Supply chains differ materially across sectors in inventory intensity, seasonality, production lead times, and payment conventions. For that reason, I see the benchmark less as a rigid one-size-fits-all rule and more as a transparent starting point for asking whether the payable still serves an operating function or has become debt-like financing.
So I think we are largely aligned on the underlying principle: if it walks, talks, and levers like debt, it should not remain buried in payables. The open question is how best to operationalize that principle- through clearer reclassification, standardized disclosure of SCF balances and financing costs, an operating-cycle benchmark, or some combination of these approaches.
Jason, thank you very much for this thoughtful comment. I very much agree with the substance-over-form principle behind your point: economically similar financing arrangements should not produce materially different leverage, interest-coverage, or cash-flow metrics simply because one is routed through supplier payables rather than conventional debt.
I also agree that standardized reporting of outstanding supply chain finance balances and the associated financing cost would be a major improvement, especially if those amounts were prominent, comparable across firms, and clearly mapped into debt-like obligations and interest-expense-like costs. Your analogy to lease capitalization is very helpful in this respect. The objective should be to reduce the need for ad hoc analyst adjustments by ensuring that economically debt-like obligations are reflected consistently in the metrics investors and lenders actually use.
My concern with the current disclosure approach is that disclosure alone may not be sufficient if the obligations remain outside headline debt classifications, operating cash flow classifications, covenant definitions, and automated analytical tools. Amounts can be visible somewhere in the notes but still fail to affect reported debt, Net Debt/EBITDA, interest coverage, operating cash flow, and working-capital metrics in a comparable way.
The DIO-plus-buffer proposal is intended as an operational benchmark for identifying when supplier-related payment extensions cease to support the physical operating cycle and begin to function as general liquidity. I agree that it is a proxy, and any such benchmark would need to be applied with industry context. Supply chains differ materially across sectors in inventory intensity, seasonality, production lead times, and payment conventions. For that reason, I see the benchmark less as a rigid one-size-fits-all rule and more as a transparent starting point for asking whether the payable still serves an operating function or has become debt-like financing.
So I think we are largely aligned on the underlying principle: if it walks, talks, and levers like debt, it should not remain buried in payables. The open question is how best to operationalize that principle- through clearer reclassification, standardized disclosure of SCF balances and financing costs, an operating-cycle benchmark, or some combination of these approaches.