Jeffrey Henderson, CFO of Cardinal Health, has also been keeping a close watch on the company’s accounts receivable, which he used to review on a monthly basis. Now, twice a week, he meets with his receivables team as well as leaders in his treasury and finance departments to review trends, credit assessments of high-risk accounts, and customers’ requests for payment extensions. Although the company has recently made “minimal changes” in payment terms with both customers and suppliers, none of the changes have altered existing contracts, he told CFO.com.
Nevertheless, a fair number of finance executives are getting edgy about balancing accounts payable and accounts receivable. There’s a “nervousness” on the part of CFOs about forthcoming questions from their boards about how the finance chiefs are handling working capital, says Hye Yu, customer to cash global practice leader at REL, a consulting firm.
They have reason to be concerned, since their customers could withhold payments from their companies. Although the results aren’t conclusive yet, 10 percent of companies delayed payments to their vendors in September in response to the crisis, according to a survey of 366 treasurers and CFOs by the Association for Financial Professionals. The report, done in late September, said that 18 percent would continue to be late in paying their bills if the credit crunch didn’t abate.
Overall, there hasn’t been a much of a downward swing on companies’ ability to collect money, says REL financial analyst Karlo Bustos. But it’s too early to tell the full effect of September’s market troubles on companies’ working capital performance, considering that financial results for most companies’ third quarters — which included only the last two weeks of that fateful month — are just coming in.
Moreover, the fourth quarter is typically one of “gamesmanship,” Bustos says. In the last three months of the year, regardless of the current state of the financial markets, companies will be more aggressive about keeping their inventory levels down, paying off vendors, and collecting overdue payments from customers to improve their working-capital numbers, he adds. So REL expects to see companies record smaller or level days sales outstanding (DSO) in the waning months of 2008.
The firm also expects to see companies use the credit crisis and the fear of recession as reasons to hold onto cash and postpone payments to banks and suppliers. Bustos cautions against that, however, because it could mean damaged relationships with those entities. “You’re not helping yourself if demand picks up tomorrow and this global recession that’s looming about doesn’t occur,” he says.
Bustos recommends that companies take a long-term view of working capital by assessing and mitigating risk, keeping a close eye on their customers, and sketching out what-if scenarios. They should also find ways to keep the communication lines among sales, collections, operations, and treasury departments open so that any problem customer accounts are noticed quickly.
In the near future, REL’s Yu expects, companies will start tightening up the extended credit terms given to customers over the past several years as they realize that longer terms hinder their ability to predict their vendors’ ability to pay.
To be sure, smaller companies with large customers will have a tougher time pushing back. Charles Young, CEO of Detroit-based SDE Business Partnering, a $64 million logistics and staffing company, saw instant cash-flow problems when General Motors, one of the company’s largest customers, extended its payment terms to 75 days.
Previously, Young says, GM would pay for SDE’s staffing services two days after SDE submitted time cards. “That was probably the biggest impact [of the credit crunch], along with the banks being really tight, and [it] caused me to look for other options,” he says.
To keep money flowing, Young has increased the company’s credit line, taken out short-term notes, and plans to finance his receivables. He has also expanded his business model to the education, aerospace, and petroleum sectors so that now only 30 percent of his business involves the automotive industry.
Last month, GM extended payment terms for U.S. companies that supply some of its services from an average of 47 days to 60 days, says Bo Andersson, the automaker’s group vice president of global purchasing and supply chain. Those changes put the company more in line with payment turnarounds of other countries, he says.
In general, it’s common for companies to look for ways to stretch their payables during a downturn as well as to try paid more quickly. But for smaller companies that push-pull can be a big challenge. Says Monahan, “It’s critical at a small-business level to manage their cash flow as well as not to overuse credit, to make sure they communicate with customers on payment, and not to over-increase their inventory.”