Free cash flows and capex accounts payable

Maybe a stupid question, but when you calculate free cash flows by subtracting capex from EBITDA and the change in working capital, do you normally adjust for the fact that some capex might be sitting in accounts payable and hence should be backed out of accounts payable in order to not count it in both capex and change in working capital?

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Comments (8)

Sep 18, 2013 - 10:16am

jec:

unpaid capex shouldn't be in accounts payable....


It should be included in AP on the balance sheet (where else?).

Here's how the the CF calculations work (assuming that you calculate CF using formulas linked to BS and IS):
1) For calculating CF based on BS and IS, you'd need to adjust your "standard" CF calculation for this issue. To do so, you decrease (=reduce the cash inflow due to) "change in AP" and increase (=reduce the cash outflow due to) capex and report the unpaid capex as a noncash investing activity in the notes to the financial statements.
2) In the next period (assuming you now paid for whatever you bought the previous period), you need to account for it as well, as to not misclassify investing CF as operating CF. To do so, you increase (=increase the cash inflow due to) "change in AP" and reduce (=increase the cash outflow due to) "capex" in your CF table to account for the increase in AP being capex-related.

Result: Instead of
- (wrongly) recording an operating inflow and an investing outflow in period 1 and an operating outflow in period 2, you now
- only record an investing cash outflow in period 2.

Sep 18, 2013 - 10:17am

Thanks for the reply. The reason I am asking is because I have seen capex included in AP, however, from an accounting point of view, and to answer your question, shouldnt capex normally be included in something like notes payable or something rather an AP and hence typically not be in WC in the first place?

On the same note, if you adjust WC for capex AP, do you then make an adjustment to net debt (assuming it should be included in a notes payable)?

Sep 18, 2013 - 10:46am

Not in notes payable (unless you sign promissory notes for your capex purchases).

Good question on recording unpaid capex as net debt. Assuming you're asking for valuation matters: It depends if it is a recurring item. Regarding that as highly unlikely, I'd regard the unpaid capex as debt (despite it being part of AP in the BS), since I'd also not include the pay delay in my CF projections (i.e. base my forecast on an adjusted historic CF calculation that pretends capex was always paid within the respective period).

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Sep 18, 2013 - 9:25am
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