Big Business’ Dirty Little Secret

November 21, 2008

Piggy bank

Several years ago my company’s average net receivable – the amount of time our customers wait before paying for our services – was just over 30 days.  Around 2002 that average started to rise, first to 45 days, then to 60.  Two years ago one of our largest customers – a big gorilla of a company – unilaterally raised their payment terms to 90 days.  Other companies followed their lead.  (So much for a contract being a contract.)

Last month the big gorilla sent us a letter indicating that they were again changing payment terms on our contracts to 120 days.  Any work we perform for this company today will generate payment to us in March.  To get payment we hope they survive that long, and that they don’t change the payment terms yet again.

Businesses that delay payments ruin our cash flow in order to preserve theirs.  The big companies are essentially using their suppliers as piggy banks to get cash – essentially for free – for which they would normally have to go to the banking industry to obtain.  Today’s tight credit markets will inspire many other companies to follow suit.  Picture yourself being told by your employer that your next paycheck will be delayed by a month.  Good luck staying atop your mortgage and utility bills.

With terms like this some companies are no longer potential clients of ours because we can’t justify the risk of their bankruptcy within that time frame.  Four months is too long in today’s economy to risk doing work in some teetering business sectors.

We’re just a tiny player in the game but luckily the big gorilla is only a small fraction of our business.  Pity the cash-poor companies dependent on a big gorilla for the bulk of their revenue, receiving the same letter as us.  Their cash flow is going to tank.

This is an artificial boost to the bottom lines of the S&P companies at the expense of everyone else.  Payment delays are a one-shot method to inflate the corporate balance sheet (and therefore the stock price) without addressing any underlying business problems.  Other than providing executives a way to hit their bonus targets I see no business upside to this practice.

So the stock prices of the Dow and the S&P are being silently buttressed by the small businesses being forced to subsidize them; and the small business community – still the heart of American capitalism – has its back to the wall because of it.


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