Management Accounting

Customers “Banking” on Your Working Capital

Nearly all business-to-business suppliers are feeling their working capital squeezed by customers delaying payments, according to the Credit Resear...
Sarah JohnsonMarch 4, 2009

Nonfinancial companies are unwittingly acting as banks these days, as customers slow down their payments in an attempt to give their own working capital flexibility.

In a recent survey of corporate credit-department managers, 94 percent said they suspect that their customers are leaning on them for their working-capital needs more than they were during the past few years. And it’s no wonder creditors have that concern: 79 percent of 1,085 companies surveyed last month said that they have seen a general slowdown in their customers’ payments. And just over two-thirds said their customers’ banks have tightened their lending practices.

As a result, suppliers and customers are stuck in some of the many vicious cycles that this credit crisis and accompanying recession have wrought: a push-and-pull between receivables and payables, and the uncertainty brought on by businesses wanting to hold onto valuable customers during tough times, but still needing to get cash in the door. Nearly half of companies believe the crisis has put a strain on their working capital, and 88 percent attribute it with negatively affecting their overall business, according to the Credit Research Foundation, a nonprofit research group that recently conducted its second crisis-related survey and shared the results with

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“When a customer leans on their suppliers more, it may help the customer, but it hurts the supplier because they get paid slower,” Terry Callahan, president of the organization, told “This affects their cash flow and ultimately their working capital. It’s part of the continuous cycle of negative effects on businesses.”

In his analysis of the poll — which the organization plans to conduct every quarter until the crisis ends — Callahan called trade credit “the fuel that drives our economy.” After all, he explained, it totaled $2.42 trillion in 2007, almost a half-trillion more than the amount banks extended to businesses that same year.

Moreover, Callahan suggested that credit agreements between businesses rely on confidence — a characteristic that is clearly missing on the part of investors and also on the part of trade creditors. For instance, 63 percent of companies have increased their bad debt reserve in recent months. In various quarterly earnings calls in recent weeks, including those at Harmonic Inc., Ensco International, and ION Geophysical Corp., CFOs have attributed these higher reserves to the uncertainty in the marketplace.

Further reflecting creditors’ lack of confidence: 61 percent have tightened up how they extend credit. Until recently, businesses have been known for too-easily granting trade credit based on little or no financial information about their customers, to speed up a deal and avoid offending the potential customer.

And, of course, companies today are reluctant to lose any customer during this downturn. Only 34 percent have been sending their delinquent accounts to collection agencies, and only 14 percent are requiring their delinquent customers to pay a late fee, or considering such a requirement, says the Credit Research Foundation. Then again, Callahan notes, companies may realize that collecting any late fee these days would be “futile.”