While talking with business clients about customer payments, there is a common thread beginning to appear. Customers are taking longer to pay their accounts. These are not the financially risky or new customers. These are the financially strong long term customers.
Many companies are starting to stretch out their payment terms with their suppliers. Many times, the customers are adding weeks to the payment terms in order to use these funds for their own corporate purposes. For many companies, stretching out their payment terms is allowing them the opportunity to use their own cash for capital improvements, major equipment purchases, stock repurchases and greater cash control.
As we all know, when companies make slower payments to their vendors, this slow down causes a ripple effect for the vendor and their business model. This impact causes the vendors to tie up their own cash as they float the variance in the payment terms.
We all know the old saying “cash is king”. It seems like this more true today than before. With the banking regulations making it difficult for companies to use lines of credit or other funding, many companies have made a shift to managing their own cash flow operations in order to improve their bottom line. This model of cash flow management has become an improved way for companies to fund expansions or improvements without the need of traditional lending.
According to recent news and an article in the Wall Street Journal by Serena Ng, companies such as J.C. Penney Co, Dupont Co and Proctor & Gamble Co. “are trying to reduce the amount of cash tied up in day-to-day operations by taking more time to pay suppliers, collecting faster from customers or reducing manufacturing and inventory costs.” Many business owners have used this type of cash management for years. The difference seems now appears to be that more companies are utilizing this mechanism and are pushing payment terms even further out than before.
So, how is this impacting your business? Will this type of cash management by your customers impact your business and are you starting to since the slower payment. Many companies will feel the impact of the slower payment terms. Are you prepared when your customers start asking for longer payment terms? If you have questions, please let us know. We would be glad to talk with you.