Stretching Payments, Corporate Bullying Are Highlighted in the Wall Street Journal
Credit & Collection Concerns Are Front Page News These Days You may have noticed the front page article in the Wall Street Journal a week and a half ago which detailed how large firms are stretching their payments with suppliers while at the same time getting more aggressive in collecting from their customers (Big Firms Are Quick to Collect, Slow to Pay). At the same time, smaller firms are being forced to pay their suppliers faster, yet are seeing payments from their customers come in more slowly. That relationship - where larger firms have the clout to pay more slowly AND get cash in the door faster than their smaller brethern - existed before the current financial crisis. But the article noted that it has gotten significantly more pronounced over the last year. The Journal's research was conducted by REL Consultancy), whose research we cited in last week's Tip of the Week as well ("Seven Principles of World Class Financial Reporting"). The difference in DSO between large (over $5 billion in sales) companies and small (under $500 million) is striking: Companies over $5 billion in sales:
DSO in 2009: 41.0
DSO in 2008: 41.9 Nearly a full day drop in DSO is quite significant any time, but particularly over the last year. The takeaway is that large companies are really buckling down and making receivable management a high priority! It's also noteworthy that despite the bad economy, their customer bases have held up well enough to enable them to collect faster. On the other hand, at smaller companies (those under $500 million in sales), the figures don't look so good:
DSO in 2009: 58.9
DSO in 2008: 54.4 As much as a one day DSO drop is significant for larger firms, it's even more significant that in a time of such stress, DSO has risen 4½ days for smaller firms, further exacerbating cash flow problems that firms may already be experiencing. The differences are striking on the other side, too... Maybe smaller firms are getting paid more slowly in part because their bigger-sized customers are paying them more slowly. According to REL's research, larger firms are paying in 55.8 days in 2009, more than 2 ½ days slower than in 2008! Yet smaller firms are paying in 40.1 days, on average, almost two days FASTER than in 2008! As the article noted, big firms simply have more leverage - on both the A/R and A/P side of each transaction - and so can use "muscle" to get their way. At Credit Today, we take the view that contracts are sacred. They're the foundation of a capitalist and civilized society and any amount of "muscle" to get a little more on a contract is simply unethical and not the way you want to treat a trading partner. The mafia uses muscle. Companies dealing with suppliers shouldn't. Without confidence that contracts can be trusted, the entire system begins to break down. Sure, you can negotiate hard, as Wal-Mart, for example, is famous for. But it must be in the context of a fair exchange between mutual trading partners. And whatever you agree on, it's both sides' obligation (no matter how much leverage you have) to honor that contract. We like to cite an example of getting a haircut at your local barbershop. Let's say you're a bigshot businessman who buys a lot in town. You walk into a barbershop and your friend, a local barber who's been cutting your hair forever, delivers the service and does a nice job of cutting your hair. But in an effort to manage your cash flow, you tell him "sorry, Joe, I'm going to hang onto this money an extra week. I don't care that you expect the money now. I just want to keep the money a little longer. I'll have someone send you a check in a week." And then, if possible, you mail the check from the farthest bank in the country to make sure you get an extra couple of days. Of course, that would never happen. But it's essentially the same thing as what some large firms are doing these days. One of the reader comments on the Wall Street Journal's website about this article was telling. "I sat in a C-level corporate meeting one day and heard the Executives complain about a Customer who paid slowly and treated us aggressively. They agreed that we didn't want to do business with them. "We then changed subjects and talked about extending payments to our Suppliers. When I pointed out that our Supplier's Executives were probably having the same conversation about us that we just had about our Customer, they didn't seem to get the connection and started to talk about the importance of managing Cashflow. "Having been a Supplier, I knew who paid quickly and who didn't. When I had to decide who to help and who to delay, the answer was clear. With all the talk about cohesive Supply Chains and the importance of collaboration, I don't understand why companies think it is okay to abuse their Suppliers cashflow. Why are companies surprised their Suppliers don't jump through hoops for them when they refuse to pay in a timely manner? The bottom line? You might be gaining a modest amount of extra cash, but if you do it by bullying and a lack of respect for your trading partner, we certainly don't believe that's going to be good for your business The key takeaways from this article?
- Credit & collection issues are more important than ever in today's business world
- Larger companies pay more slowly that smaller firms
- Larger firms collect their receivables more quickly than smaller firms
- Larger firms often abuse their position of strength
- In the long run, we think any deviation from a contract based strictly on the ability to get away with it, is bad for business
An even more important point, you might be asking, is HOW do I - in credit - deal with a corporate bully? We've mentioned this before, but it's definitely worth repeating. Here's the best way to finesse a demand for longer terms from a customer, large or small. And we emphasize the word "finesse" in this situation. That's critical. How to Respond When an Important Customer Arbitrarily Wants to Set Longer Terms For Payment (open access)
| 
Webinars
