By whatever measure you choose, big companies are taking longer and longer to pay their smaller vendors.
Between March 2009 and today, corporate payables have jumped on average from 35 days to 46 days, according to the director of the Georgia Tech Financial Analysis Lab.
“Ever since the recession, it’s very clear that payment rates are slowing,” says Charles Mulford, the director and an accounting professor at the university. Mulford bases his calculation on the lab’s database of the financial reports of 3,000 non-financial U.S. public companies.
At the same time, according to REL’s survey of working capital performance in 2013 among 997 large, U.S. nonfinancial public companies, the top quartile averaged 35.9 in days payable outstanding, while the median company came in at 25.1 days. Overall, the companies increased their payables days by 2% between 2012 and 2013.
Big Companies Win
To put the 11-day increase in payables days over the last five years in context, Mulford poses the example of a larger company that purchases about $83,000 in inventory from a smaller company every 30 days. An increase in the number of payables days from 35 to 46 would enable the bigger company to hang on to about an extra $30,000 for the month.
On the other hand, if the larger company’s days payable were reduced back to 35 days, the smaller company would have access to that $30,000 in cash each month.
Mulford thinks that the probability that a bigger company would be better able to handle a lack of cash than a smaller company would was likely part of the thinking behind the Obama administration’s launch earlier this month of an initiative to boost working capital among smaller companies.
Called SupplierPay, the program currently includes 26 big companies — including Apple, Coca-Cola, Lockheed Martin and Salesforce.com — that have committed to one of two actions.
One choice is to either pay their small suppliers faster than they do today “in order to reduce their capital needs,” according to a White House press release. The other alternative would be to enable “a financing solution that helps small suppliers to access working capital at a lower cost.”
In one example cited by the White House, Intuit “is making a permanent change to its payment term policy to accelerate the payment terms for its small business suppliers, who will now be paid within 10 days.”
The program is a follow-up to the Federal Government’s QuickPay initiative, which was launched in 2011. QuickPay requires federal agencies to speed payments to small-business contractors “with the goal of paying within 15 days,” according to the release.
To Mulford, 15 days “sounds like a fairly lofty goal” for most companies, “considering the time it takes the company to produce the invoice and get it in the mail.”
The sentiment, however, is on target, according to the professor. If small companies get their cash flow sooner, “they will be in a better position to hire, to buy new capital assets, all the things that help the economy,” he says. “That’s in all our interests.”
On the other hand, larger companies could find themselves seriously short of free cash flow if they slash their days payable. “And for these large public companies that’s everything,” Mulford says. “If they lower their free cash flow, they lower their ability to make capital investments, invest in dividends and do acquisitions.”