The latest issue of CFO magazine contains their annual Working Capital Scorecard of the nation's largest firms. The survey highlights the importance of efficiently managing working capital, primarily receivables, payable, and inventory. In the survey, lower receivables are good, meaning you are able to convert receivables to cash more quickly. And of course, lower inventories are also a positive, since that means you're not tying up working capital in slow-moving inventory.

But a part of the working capital calculations bothers us. That's the accounts payable side. In their side-bar on "how working capital works," they note in the "Days Payables Outstanding" (DPO) section that "an increase in DPO is an improvement, a decrease a deterioration."

And they cite examples of companies who, because they were severely strained, sought to basically save themselves from extinction by stretching out their payments with less important suppliers. The CFO of Cytec, a large chemical supplier, had $250 million in debt due in 2010 and "investors were questioning" their liquidity. So, "on the infrequent, low-volume and high-volume suppliers, it was easy to just extend terms as new purchases were made," Cytec's CFO told CFO magazine. "'On the higher volume vendors, we worked with them,' sometimes offering them more volume for better payment terms."

Now, we can certainly understand and recognize the need to scramble when there's a debt problem and the survival of the company is at stake. And we suspect the suppliers were happy to take the business, even if the payments weren't what they had initially expected.

But overall for the year, the survey showed that the deterioration in DSO for 2009 was just about equal to the jump in DPO, so the two activities tend to cancel each other out.

We just don't think that higher DPO is a cause for celebration for any firm, even those seeking sound working capital management. Our capitalist system works because of our great respect for the rule of law and for the sanctity of contracts. In anything other than a crisis situation, a company's first priority should always be to honor the terms negotiated with their suppliers. Systematically slowing payments to valued suppliers is hardly what we'd call "an improvement."

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