When the economy is going strong, more often than not, suppliers are receiving whatâ€™s owed to them in a timely fashion. Commerce chugs along and cash flows stream smoothly. As the economy sags and it takes longer and longer for retailers to get products off the shelves and out the door, they begin to drag their feet on invoices. Suppliers and manufacturers then find themselves in a pinch and the pangs of delinquency trickle their way through the entire supply chain.
â€śWith the supply chain, youâ€™ve got the flow of goods between manufacturers and wholesalers and retailers and the transportation companies that move everything. And the flow of moneyâ€”in that particular segment of the economyâ€”is really important,â€ť stated Jim Swift, CEO, Cortera, Inc. â€śIf Iâ€™m a manufacturer, I need cash to buy more ingredients and more raw materials in order to increase my production, my inventory and my shipments.â€ť
Insurance companies and financial institutions like banks can survive more easily if customers begin to slow pay. But for manufacturers and suppliers, growth is culled and revenues curtailed until payments for past invoices are received. Over the past two years, there has been a sharp increase in delinquencies, which has been accompanied by a sharp uptick in accounts sent for collection. Days sales outstanding (DSO) has widened as more and more companies began hoarding cash, uncertain of the economic future of the nation, let alone their own industry. But, as other indexes have also begun to spy, Corteraâ€™s Supply Chain Index (SCI) has seen payment conditions throughout the supply chain have become increasingly more favorable over the last several months.
Tracking payments against agreed upon terms, the latest SCI release shows that, overall, the amount of late account receivables (A/R) has continued to trend downward from high water marks set at the end of 2008. According to the August SCI, the amount of A/R more than 30 days past due has fallen to a hair above 10%, which is a level not reported since last October, when the SCI saw a spike in delinquencies in correlation to the financial meltdown. In December 2008, the amount of late A/R peaked to a reading of 23%, but has since worked its way down steadily for nine straight months. Though the current level is still above the majority of what was seen in 2007 and 2008, the declines are signaling that change has taken hold.
â€śIt tells me, that at least in the minds of finance folk, there is some kind of return of stability to the system,â€ť explained Swift. â€śIf youâ€™re a finance guy and you slow down your payments to your suppliers, itâ€™s probably one of two reasons. Itâ€™s either because you donâ€™t have confidence in your sales forecast, so youâ€™re trying to hoard your cash, or, itâ€™s because you canâ€™t pay; you have your own cash issues.â€ť
Swift admitted that he wasnâ€™t sure if it was simply fear or whether customers were really going bad and not paying their bills at such a rapid rate, which caused the spike in the amount of late A/R in December 2008. But the fact that there was a similar spike seen in the SCI in December 2007 may suggest some kind of seasonality. Regardless, he said the declines the SCI has reported in the amount of late A/R over the last several months goes beyond psychology to the actual physical cash flow in the system. It demonstrates that not only are companies getting healthier, but that finance departments are also growing more confident.
â€śThe way we look at it is that the faster the money flows through the system of the manufacturing and supply chain world, the more efficient production is,â€ť said Swift. â€śIf the money isnâ€™t flowing that fast, that means inventories are piling up, production is way down or there is something else that is wrong in the actual flow of goods.â€ť
He added, â€śWhen we see things like thisâ€”where weâ€™re back to levels that we hadnâ€™t seen in a yearâ€”that tells me cash flows are moving a lot more smoothly than they were. What does that mean for the overall economy? Well, extrapolate it up.â€ť
Unfortunately, what Cortera is also finding throughout the supply chain is that though the total amount of late A/R is receding, items days beyond terms (DBT) continue to grow grayer. The August SCIâ€™s DBT measurement is 15% worse than last year.
â€śThe amount of debt that is late is returning back roughly to the same point where it was last year, but itâ€™s later,â€ť said Swift. â€śSo, weâ€™re looking at some of the deeper bucketsâ€”the 90+ day bucketsâ€”and trying to figure out if itâ€™s a temporary thing or what else is happening. The simple answer is that itâ€™s a similar amount thatâ€™s late, but later than what it was before.â€ť
It's an unfortunate duality. The increases in aging, those accounts pushing their way past 60 and 90 days, become harder and harder to collect on. And the trend can also be representative of a coming change.
"It can be a change in behavior, where weâ€™re just going to get later and later and later, and weâ€™re okay with that now,â€ť explained Swift. â€śIt could also be a temporary blip. Or it could mean that things are moving toward write-offs. It could just be a build-up of debt that will never be recovered and we might see a bump in collections down the road. Thatâ€™s the part we donâ€™t know.â€ť
Sifting through the numbers, Swift said that small companies are being more profoundly impacted by the economy, lagging to recover and are guilty of paying slower. Cortera expects to have a more detailed release of this data in the coming weeks.
Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National