Kora Foods Plc: Growth, Margins and a Director Under Pressure

The cash conversion cycle has lengthened from 45 + 50 − 60 = 35 days in 2023 to 73 + 65 − 78 = 60 days in 2024.

Concern 1 - the growth is unprofitable and unfunded. Revenue rose 20% but operating profit fell from ₦34m to ₦30m. Margin has been given away to win volume (gross margin down five points) while overheads grew. The extra 25 days of working capital absorbs cash, which explains the negative operating cash flow of ₦8.0m against a ₦12.6m profit: the business is overtrading, financing debtors and stock with payables and borrowings.

Concern 2 - the financing structure is now fragile. Finance cost doubled to ₦12m and interest cover has fallen to 2.5 times, with gearing at 55% and net debt at ₦118m against equity of ₦90m. A further fall in operating profit of about ₦18m would leave cover below 1.5 times. The comfortable-looking current ratio of 1.56 rests on inventory that now takes 65 days to sell, so liquidity is weaker than the headline suggests - the quick ratio is only 1.00.

Proposal 1 - reclassifying the overdraft as long-term. IAS 1 requires a liability to be classified as current unless the entity has a right at the end of the reporting period to defer settlement for at least twelve months. That right must exist at the reporting date and must be substantive. A verbal, unsigned indication from the bank is not a right; it is an intention that may not survive credit committee. On the facts the overdraft is repayable on demand and must stay current. If a signed three-year facility had been in place by 31 December 2024, classification as non-current would be justified - timing and evidence are what matter, not the bank's goodwill.

Proposal 2 - deferring ₦4m of credit notes. The credit notes relate to sales already recognised in 2024. Where goods have been returned or a price concession agreed before the year end, revenue must be reduced in 2024. Holding the paperwork back until January does not change the economic substance: revenue is recognised when control of the goods passes and at the amount expected to be received. Deferring the credit notes overstates 2024 revenue, receivables and profit - a misstatement, not a policy choice.

Professional issues. Both proposals are designed to help the company meet covenants that it currently fails. The accountant faces an intimidation/self-interest threat: objecting may be career-damaging, complying misleads the bank. The right response is to refuse to process the entries, document the disagreement in writing, escalate to the audit committee or non-executive directors, ensure the covenant position and the going concern assessment are disclosed under IAS 1, and take advice before signing anything. The 'everybody does this' argument is not a defence; the test is whether a reasonable and informed third party would regard the treatment as appropriate.

1. Tighten credit control. Bringing receivables days from 73 back to the 2023 level of 45 would release roughly (73 − 45)/365 × ₦240m ≈ ₦18m of cash. That means credit limits, aged debt review, stopping supply to slow payers and considering early-settlement discounts. This attacks the cause of the negative operating cash flow - sales on credit that are not converted into cash.

2. Reduce inventory days. Returning to 50 days would release about (65 − 50)/365 × ₦168m ≈ ₦7m. Slow-moving lines should be identified and cleared, and reorder levels reset. Inventory is the least liquid current asset, so the current ratio of 1.56 is flattered by it; the quick ratio of 1.00 is the number the board should manage to.

3. Stop paying for growth with borrowings and stretched payables. Payables days of 78 already exceed the 2023 level of 60 and risk supplier withdrawal, so stretching them further is not an option. Instead the dividend (₦4m), now uncovered by operating cash flow, should be suspended; a modest equity injection or sale-and-leaseback of property, plant and equipment could reduce the ₦110m loan notes burden, cutting finance cost and restoring interest cover.

Each action addresses the underlying problem - the cash conversion cycle has stretched from 35 to 60 days while margins fall. Cutting prices further or borrowing more would simply enlarge a cycle that is not self-funding.