Management Accounting

The Check May or May Not Be in the Mail

Recent data shows that collecting cash is no easy feat these days.
Alix StuartJuly 11, 2011

If you’re wondering why your customers aren’t paying you, you’re not alone. According to a new Dun & Bradstreet report covering data through the end of the first quarter, business delinquency rates are actually up compared with last year, when the economic outlook was a bit rosier. In fact, businesses report that the percentage of dollars they owe that are more than 90 days past due is only slightly lower than it was at the peak of the recession, implying that more are struggling — or at least feel like they’re struggling.

What with macroeconomic problems such as the housing slump, weak consumer demand, and tension in Libya, among others, businesses “continue to be nervous, and they’re conserving cash,” says Byron Vielehr, president of D&B North America.

On the positive side, Vielehr points out that D&B’s estimate of business failures declined by about 2% over the quarter, while formal bankruptcies dropped 8%.

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For the most part, the payment slowdown is from larger businesses delaying their payments, sometimes as a strategic financing mechanism. According to D&B, the percentage of companies with more than 50 employees that reported they were paying late increased for all size categories between April 2010 and March 2011, generally by 3% to 5%. While larger businesses historically take longer to pay, now “some large corporations are telling suppliers it will be 90 days and even 120 days until they’ll see payment,” compared with standard 30-day terms, says Ernie Brown of Financial Manager’s Resource, a Massachusetts-based lender that helps cash-strapped companies factor their receivables.

Small businesses are in fact improving their payment rates, possibly because they are being forced to by suppliers that turn off trade credit. According to D&B, the percentage of firms with fewer than 50 employees that reported late balances decreased about 4% between spring 2010 and spring 2011. Small businesses “get less slack from their vendors,” observes Vielehr, and “are also more concerned with paying on time as they face harsher consequences for late payments, including worsening credit ratings.”

Industries with the highest delinquency rates for the first quarter were manufacturing, telecommunications, and automotive. Real estate, natural resources, and insurance were the industries with the lowest delinquency rates, according to D&B.

Also contributing to the slowdown: companies generally don’t seem to be particularly aggressive about collections right now. According to a recent analysis of 1,000 large companies by consulting firm REL that will be featured in the July/August issue of CFO magazine, days sales outstanding was essentially flat from 2010 to 2011, averaging around 36 days both years. Net working capital as a percentage of revenues declined slightly over the year.

Some changes in business strategy may also be contributing to slower payment cycles. Days sales outstanding at networking-equipment firm Ciena, for example, stood at 84 last quarter, up from 77 the previous quarter. In the $902 million company’s most-recent conference call in June, CFO James Moylan attributed the rise to a number of factors, including the fact that proportionately more revenue — almost half in the first six months of the year — is coming from overseas sales.

“Generally speaking, as you move outside of the U.S., you do get somewhat longer payment terms; it’s just the way people do business,” Moylan said, according to a transcript posted on SeekingAlpha. “And so whereas we used to think in terms of day[s] sales [outstanding] as being in the low 70s, my guess is, we’re going to be in the high 70s or so going forward.”

That being said, it’s hard to explain away all the signs of erosion. “When you couple this [the payment slowdown] with what we see in GDP and jobs growth,” says Vielehr, “it looks like it’s going to continue to be a slow recovery.”