SIGNAL OR NOISE · THE BORROWER · EARNINGS
A contractor recognises revenue as work progresses. This year its revenue rose 20%, cash received from customers rose 3%, and the 'contract assets' on its balance sheet doubled.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Window Dressing: a Worked Example
One good afternoon a year, and eleven months of overdraft.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED · 6 MIN READ
// THE SHORT ANSWER
A balance sheet is a photograph taken on one day, and a business that knows the day can arrange to look its best in it. Window dressing is that arrangement: pressing customers to pay, holding supplier payments over the date, clearing the overdraft and drawing it again a week later. Much of it is lawful, and the figures can be accurate. A lender's task is to see the year rather than the day, using what a year-end balance cannot hide: the bank's own record of the account, month-end balances, the interest actually paid, and what happens in the weeks after the date.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 07 — Coastline Retail Group. NPAT up 9%. Operating cash flow down 31%. The dividend consent request is on your desk. Your call first, then the senior banker's.
PART OF Credit Analysis for Beginners
// 01 — WHY ONE DAY CAN MISLEAD A LENDER
A lender reads leverage, net debt, the current ratio and working capital days from the balance sheet, and some covenants test them on that date. The most movable lines are the ones a business controls day to day: cash, the overdraft, trade debtors and trade creditors. A supplier run due on the last day of June can go out on the second of July; a large customer offered a discount pays a week early. Each moves the photograph without moving the business.
Accounting makes some of this easy to miss. In the cash flow statement, the standard used in New Zealand and Australia counts an overdraft repayable on demand within cash and cash equivalents where it is an integral part of cash management, noting that such a balance often swings between credit and overdrawn; FRS 102 has a similar rule in the UK. The year's swings in the overdraft then do not appear as borrowing or repayment, though the balance sheet still shows the overdraft as a liability. The line between arranging timing and misstating accounts is for auditors and courts. A lender's question is narrower: does the figure describe the business it is lending to?
// 02 — HOW IT IS DONE AND WHERE IT SHOWS
Arrangement Where it shows
Debtors pressed, early-payment discounts debtor days low at year-end only
Supplier payments held over the date creditor days high; cash up
Overdraft cleared, redrawn after interest paid too high for the debt shown
Invoices sold to a factor before the date debtors and borrowings both lower
Purchases deferred, stock run down sales or margin dip after the date
Some arrangements change a ratio by arithmetic alone. Paying suppliers out of cash on the date lifts a current ratio that is above one: current assets of 20 against current liabilities of 16 is 1.25 times; spend 6 of the cash on creditors and it is 14 against 10, or 1.40 times. Nothing has been earned. Disclosure helps at the edges. Accounts under the international standard must describe supplier finance arrangements, which can stretch creditors with a financier's help. Australia's Simplified Disclosures reporters must give the same disclosures; New Zealand's Tier 2 for-profit reporters are exempt from them. The UK's FRS 102 added similar requirements for periods beginning on or after 1 January 2025, but a small company, or a subsidiary using reduced disclosures, may present no cash flow statement at all. And many private companies in New Zealand and Australia need not prepare general purpose accounts.
// 03 — THE EXAMPLE
A steel stockholder, constructed for this page like every figure in it, has a June year-end, a term loan of US$8.0m, an overdraft limit of US$9m priced at 8%, sales of US$120m, purchases of US$100m and EBITDA of US$5.0m. Its banker sets the year-end against the average of its twelve month-end balances. In US$m:
30 June Average month-end 31 July
Overdraft drawn 0.6 6.1 6.8
Trade debtors 10.4 13.0 12.6
Trade creditors 12.9 9.2 9.0
Overdraft interest paid in the year 0.49
Implied average balance 0.49 ÷ 8% = 6.1
Debtor days year-end 10.4 ÷ 120 × 365 = 32 average 40
Creditor days year-end 12.9 ÷ 100 × 365 = 47 average 34
Leverage year-end (8.0 + 0.6) ÷ 5.0 = 1.72×
average (8.0 + 6.1) ÷ 5.0 = 2.82×
The stockholder broke no rule. It pressed customers in June, paid its suppliers on 2 July, and for one day the overdraft was nearly clear. But the business uses about US$6m of overdraft for most of the year, and the interest it paid says so: the interest check assumes the rate held all year, as it does here. By 31 July the overdraft is back to US$6.8m and creditor days are lower than they were at the date. The audited figure is true for 30 June. The figure the lender sizes its facilities on is the second leverage line.
// 04 — HOW IT DIFFERS FROM A CLEAN-DOWN
A test date is the day a covenant is measured; window dressing can happen on any reporting date, with or without a covenant. A clean-down is the reverse arrangement, written by the lender: some working capital facilities require the balance to fall to zero, or a low level, for a number of consecutive days each year, to show the line is not permanent borrowing. A borrower that meets its clean-down by holding back suppliers has dressed the window for its own bank. The part of an overdraft that does not clear is hardcore, term debt in all but name, and the average balance reveals it.
DEFINED IN ONE PARAGRAPH → · THE TEST DATE → · THE CASH NETTING CAP →
// 05 — WHERE IT DECIDES A FILE
A lender that banks the business holds the best evidence: daily balances, the peak and the low of the overdraft, and the dates of large receipts and payments. One that does not asks for month-end balance sheets in the monthly pack, aged debtors and creditors at the year-end and a month later, and the interest paid. It reads them for the pattern, since a seasonal business has honest reasons for a strong June.
The reading then shapes the structure. Facilities are sized on average and peak use, not on the year-end, and the hardcore may be moved into a term loan with a repayment schedule. Covenants tested quarterly rather than yearly make one good afternoon less useful, and a cash netting cap limits the credit for cash gathered on the date.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- Australian Accounting Standards Board, AASB 107 Statement of Cash Flows (compiled, applicable to periods beginning on or after 1 January 2024), the Australian text of IAS 7 — paragraphs 8 and 44F–44H — Includes an overdraft repayable on demand that is an integral part of cash management in cash and cash equivalents, noting the balance often fluctuates between positive and overdrawn, and requires disclosure of supplier finance arrangements — sections 01 and 02.
- Financial Reporting Council, FRS 102 Factsheet 9: Initial application of the Periodic Review 2024 amendments — Confirms the new supplier finance disclosures in FRS 102 paragraphs 7.20B and 7.20C apply to periods beginning on or after 1 January 2025 — section 02.
- External Reporting Board (New Zealand), Supplier Finance Arrangements: amendments to NZ IAS 7 and NZ IFRS 7, and the Tier 2 RDR amendment, November 2023 — Records that the RDR amendment exempts Tier 2 for-profit entities from all of the new supplier finance disclosures — section 02.
// QUESTIONS PEOPLE ASK
- Is window dressing illegal?
- Not of itself. Collecting debts quickly, paying suppliers on the due date rather than early, or repaying an overdraft are ordinary business decisions, and the resulting accounts can be accurate for the day they describe. It crosses a line when transactions are recorded that did not happen, are reversed by arrangement after the date, or are presented so as to mislead. Where that line sits is for accounting standards, auditors and the courts in each market; a lender reads the substance either way.
- What are examples of window dressing?
- Common examples are delaying supplier payments over the year-end, offering customers discounts to pay before it, repaying the overdraft with that cash and drawing it again days later, selling invoices to a factor just before the date, deferring purchases so stock looks lean, and pulling sales forward into the period. Each makes the balance sheet or the year's results look stronger on the date without changing the business's underlying position.
- How can you detect window dressing in a balance sheet?
- Compare the year-end with the rest of the year. Month-end or average balances show whether the overdraft and working capital at the date are typical. Interest paid, divided by the rate, implies the average debt carried. Debtor and creditor days at the date can be set against the same ratios a month later. And the weeks after the date show whether the position reversed. A lender that holds the account can read the daily balances directly.
- Is window dressing the same as earnings management?
- They overlap but differ in aim. Earnings management shapes reported profit, through estimates, provisions or the timing of revenue and costs. Window dressing shapes the position on a date, usually the debt, cash and working capital in the balance sheet, and it can leave profit untouched. Pulling sales forward into the period does both. A lender tests earnings against cash flow over several years, and tests the balance sheet against the months either side of the date.
// NEXT TO IT
- THE ACCOUNTS AND THE AUDIT FILECustomer prepayments (deferred income)Cash in the bank, and a promise to deliver against it.
- THE ACCOUNTS AND THE AUDIT FILEPercentage-of-completion revenue (input and output methods)The profit is an estimate until the last claim is paid.
- THE ACCOUNTS AND THE AUDIT FILEIntercompany balancesThe group's accounts cancel them; the borrower's accounts keep them.
- THE ACCOUNTS AND THE AUDIT FILEDoubtful debts provision (expected credit loss allowance)The ledger says what is owed. The provision says what will come.
// ON WHOSE DESK
The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.
- Transaction bankerSells and structures the plumbing a business runs on — accounts, payments, collections, liquidity and trade finance.
- Personal bankerThe bank's face in a branch or on a phone: everyday accounts, cards, personal lending and the first conversation about a home loan.
- Operations analystRuns the processing every product depends on — payments, onboarding, settlements, servicing — at volume.
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