In Monday's Wall Street Journal, a cash management development that many credit professionals may have recognized long ago was illuminated and "officially" writ large: big firms have sped up their collection efforts while slowing down their own payments to suppliers and vendors.
Based on analysis provided by REL Consultancy, the working capital division of Hackett Group, a business-consulting firm based in Atlanta, the WSJ article broke down recent quarterly earnings results, which basically revealed "corporate Darwinism at work." To wit, companies with annual revenue of more than $5 billion are now collecting their bills on average in 41 days versus the 41.9 days measured last year. These same companies are taking an average 55.8 days to pay suppliers and trade creditors, up from 53.2 days in 2008, which represents a 5% increase.
Conversely, companies with less than $500 million in annual sales generally collected cash more slowly while paying their bills more quickly as compared to the same time period in 2008. Payables to vendors averaged 40.1 days, which is a 6.5% decrease compared to last year's figure of 42.9 days. Their efforts to collect payments, however, have increased 8%—from 54.4 days in 2008 to 58.9 days this year.
In the article, Sung Won Sohn, a former chief economist at Wells Fargo now affiliated with California State University, Channel Islands, explained, "There's a power struggle going on as the credit crunch has moved to Main Street. Big firms can force their terms on suppliers and customers. And if you're a small business or a small store in a mall, you have no bargaining power and have to take what’s given, which is not much today."
More specifically, Anheuser-Busch Cos. extended its payment terms for vendors from 30 days to as long as 120 days. Proctor & Gamble Co. worked the other end by "relentlessly focusing" on increasing collections from customers, among other initiatives. General Electric did both: GE increased its payment terms and decreased cash collection times, efforts that freed up $3.8 billion in cash last quarter.
Meanwhile, smaller concerns such as Monsoon Co., a software company based in Berkeley, California, are facing slower payments from its customers. Last year, Monsoon received payment 40 to 45 days after invoicing; this year, customers have stretched that time frame to an average of 70 days after billing.
At Richmond, California-based Hero Arts Inc., a supplier of inks, rubber stamps and other items to independent arts-and-crafts stores as well as large chains, a trickle-down effect is evident. While noting that the company has "snubbed appeals from smaller customers to pay for goods in 60 days rather than 30," Chief Executive Aaron Leventhal admits that there is little the company can do when a primary customer lengthens its payment cycle: "[They] have the power over small vendors. At this point we have kind of swallowed and accepted that indignity."
Subscribers can read the full article—"Big Firms Are Quick to Collect, Slow to Pay" by Serena Ng and Cari Tuna—on the Wall Street Journal website (http://online.wsj.com/article/SB125167116756270697.html).
Have your company's cash management experiences been similar to those described in this recap? Is your employer facing a different scenario? Let us know in the comments section below.