By Anika Agarwal
Negative operating cash flow is one of the most uncomfortable numbers to encounter in financial statements. Profit might still be positive. Revenue might even be growing. Yet the business is somehow consuming cash instead of generating it.
This is where financial analysis begins to move beyond surface-level metrics. Cash flow tells a story about the movement of money through a business, and when operating cash flow turns negative, the first instinct should not be panic — it should be curiosity.
Where exactly is the cash getting stuck?
One of the simplest and most revealing places to look is working capital.
The first clue: debtor and creditor aging
Working capital analysis often begins with a simple question: how quickly does cash move through the business?
Two numbers matter immediately:
Debtors (accounts receivable) — money customers owe the company
Creditors (accounts payable) — money the company owes suppliers
But the balance sheet alone does not tell the whole story. A receivable of 100 could mean customers will pay tomorrow, or it could mean invoices have been sitting unpaid for six months.
This is where aging schedules become powerful.
Debtor aging breaks receivables into time buckets: 0–30 days, 30–60 days, 60–90 days, and beyond. A healthy business collects most receivables quickly. When invoices begin piling up in older buckets, something is wrong: customers may be struggling, credit policies may be weak, or revenue may have been recognized aggressively.
Supplier aging tells a similar story from the opposite direction. If a company consistently delays payments to suppliers beyond agreed terms, payables begin stretching into older buckets.
Together, these patterns shape the cash conversion cycle, one of the most important working capital metrics:
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding.
The cycle measures how long cash remains trapped in operations before it returns to the company. A rising cycle often explains why operating cash flow is deteriorating even while profits appear healthy. But sometimes companies take a different approach. Instead of shortening the cash cycle, they attempt to reshape it.
Enter supply chain financing
Supply chain financing is designed to ease pressure within the working capital cycle. The basic idea is straightforward. Suppliers typically want to be paid quickly. Buyers, meanwhile, prefer longer payment terms. Supply chain finance bridges this gap by introducing a financial intermediary.
When a supplier issues an invoice, a bank or financing institution pays the supplier early — often at a slight discount — and later collects the full payment from the buyer.
In theory, everyone benefits.
Suppliers receive immediate liquidity. Buyers preserve their cash for longer. Financial institutions earn a return for facilitating the transaction.
In practice, however, the structure can create something more complicated.
Because the buyer ultimately pays the same invoice amount, the obligation often remains recorded as accounts payable rather than as bank debt. From an accounting perspective, this can appear indistinguishable from normal supplier credit. But economically, the company may have gained access to a form of financing.
This distinction became painfully clear in the collapse of Carillion.
The Carillion lesson
Carillion was once one of the largest construction and outsourcing firms in the United Kingdom. It managed major infrastructure projects and government contracts. For years, its financial statements seemed stable.
Yet beneath the surface, the company had been extending supplier payment terms dramatically. In some cases, suppliers were waiting as long as 120 to 180 days to receive payment.
To keep suppliers solvent, Carillion relied heavily on supply chain financing arrangements. Banks paid subcontractors early while Carillion settled the invoices months later.
On the balance sheet, these obligations appeared as accounts payable — ordinary operating liabilities. But economically, the system had begun to resemble a form of borrowing.
The longer Carillion stretched its payables, the stronger its operating cash flow appeared. Delaying payments meant cash stayed inside the company for longer periods.
For a while, the numbers looked impressive. Then the underlying projects began losing money.
As financial pressure mounted, confidence evaporated. Suppliers became nervous, financing channels tightened, and the delicate structure collapsed. In 2018, Carillion entered liquidation. Only afterward did many analysts fully appreciate how dependent the company had become on supply chain financing.
Reverse factoring and payables finance
The Carillion episode brought new attention to a particular form of supply chain finance known as reverse factoring. In traditional factoring, a supplier independently sells its receivables to a financier in order to receive cash early.
Reverse factoring flips the arrangement. The buyer initiates the program. After approving invoices, the buyer allows suppliers to receive early payment from a bank. The buyer then pays the bank at a later date.
Because the buyer arranges the financing, the arrangement is sometimes referred to in corporate disclosures as a payables finance program or payables finance arrangement. These labels often sound benign. After all, the invoices originate from legitimate purchases. Yet the classification raises an analytical question.
Is the obligation truly an operating payable, or has it begun to function more like short-term debt?
The distinction matters. Operating payables arise naturally from business transactions. Short-term debt reflects financial leverage. When reverse factoring programs grow large, the boundary between the two can blur.
This is why analysts increasingly scrutinize changes in Days Payables Outstanding and unusual growth in accounts payable relative to purchases. If payables expand rapidly while revenue remains stable, it may signal that financing — not operational efficiency — is driving cash flow improvements.
Companies often frame these programs as supplier finance initiatives.
Supplier finance programs: the benign face
From a corporate perspective, supplier finance programs are often presented as tools for strengthening supply chains. Large companies typically have far stronger credit ratings than their smaller suppliers. When banks extend financing based on the buyer’s creditworthiness, suppliers can receive funding at lower interest rates than they could obtain independently.
In industries with fragile supply networks, this can be genuinely beneficial. Healthy supplier finance programs stabilize working capital across entire ecosystems. Yet the same structures can become risky when they grow opaque, overly concentrated, or detached from real trade activity.
That lesson emerged even more dramatically in the downfall of Greensill Capital.
The Greensill Capital shock
Greensill Capital built its entire business model around supply chain financing. The firm financed invoices for companies across the world, paying suppliers early and collecting from buyers later. These receivables were then packaged into investment products sold through institutions, including Credit Suisse.
At first, the model seemed safe. Trade receivables are traditionally viewed as low-risk assets. But Greensill gradually pushed the concept further. Instead of financing existing invoices, the firm began financing anticipated future receivables — sales that had not yet occurred. Much of this financing was tied to companies associated with Sanjeev Gupta and his GFG Alliance.
The entire system relied heavily on insurance protection from Tokio Marine. When that insurance coverage was withdrawn in 2021, the structure collapsed almost overnight. Greensill filed for insolvency, freezing billions of dollars in investment funds and sending shockwaves through global financial markets.
What began as a tool for smoothing working capital had evolved into a complex web of hidden credit exposure.
What all this teaches us
Working capital analysis may appear mundane compared with earnings forecasts or valuation models. Yet it often reveals truths that income statements conceal.
Negative operating cash flow can signal problems long before profits decline. Debtor and creditor aging can expose hidden strains within a company’s cash cycle. And unusual growth in payables can point toward deeper financing structures embedded inside the balance sheet.
The lessons from Carillion and Greensill remind analysts that even the most ordinary line items — accounts receivable, accounts payable, operating cash flow — can conceal extraordinary stories. Sometimes, the most important risks in finance are not hidden in complicated derivatives or exotic securities.
Sometimes they are hiding quietly in working capital.
This article has been republished in TCLM with the permission of the author.
