Crisis Spawns Payables-Receivables Crunch

CFOs are paying close attention to both the payment terms their suppliers are demanding and the credit terms of their customers.

Following the last downturn in the financial markets earlier in this decade, after Enron imploded and internal-control reports became mandatory, controllers became CFOs’ best friends. But with liquidity now the watchword of the day, treasurers are the ones crowding into the finance chiefs’ offices.

Cash-in, cash-out is preoccupying finance departments. “I talk to our treasurer literally every day,” says Pitney Bowes CFO Michael Monahan. “In this economic environment, it’s critical to know what the access to capital is and what capital is costing us, and to make sure we’re managing that effectively.”

Since the credit-crisis began to hit its crescendo in mid-September, CFOs at companies of all sizes have been paying ever closer attention to the cash streaming through their businesses and keeping careful watch on their suppliers’ credit terms and their customers’ viability. No one wants to see the current credit freeze among wary banks repeated between customers and vendors. Also to be avoided: getting caught in a tug-of-war between accounts receivable and payable.

Faced with bill pressures on one side, companies are looking to be paid promptly on the other. “Trade credit is the largest source of capital for small and medium-size businesses in the U.S. and the world,” says Nicolas Perkin, co-founder and president of the Receivables Exchange, which will begin trading companies’ accounts receivable later this month. “It’s always a large lockup of capital for businesses.”

At companies large as well as small, recent events have CFOs renegotiating deals with customers in anticipation that some companies could go under if the financial markets don’t improve. What’s more, they’re asking their vendors for more time to pay. For instance, Stuart Burgdoerfer, CFO of Limited Brands, told investors last month that the retailer will see a one-time float of about $100 million after changing payment terms with some of its suppliers.

Others are watching their customers closely. Barbara Scherer, the CFO of Plantronics, says, for instance, that the risk the company wouldn’t be paid for certain doubtful accounts was “close to nothing.” Nevertheless, the company is closely watching its customers’ ability to pay by “subscribing to a number of monitoring services, looking at a number of other indicators that would suggest what is going on, holding people to tight payment terms,” she says.

Some companies have gotten increasingly aggressive in their collections policies. Pitney Bowes reported a better-than-expected free cash flow of $653 million for the year through the third quarter and projects that number will exceed $800 million by the end of 2008, said Monahan, who attributes the improvement to the steady payment stream it gets from the customers of its supply and leasing businesses. And to make sure the cash keeps coming, Pitney plans to be “somewhat ruthless” in collecting payments, according to Murray Martin, chief executive officer of the mail-services company.

Monahan told CFO.com that his company has been using new technology to keep on top of its customers via automatic phone calls to remind them of bills before they’re due. The company is also making it easier for customers to pay their bills.

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