Liquidity is tight. CFOs are doing whatever they can to keep a reserve of ‘dry powder’ cash. This includes stretching account payables as far as possible, even if it means alienating some long term vendors. Many vendors have been slammed by a surge of unpaid bills. Now these same companies are receiving notifications that customers are going to take longer to pay. The following is typical of the wording included:
“We are changing our payment policy to 90 days effective (Month/Day), 2009. Please plan your cash flow requirements accordingly.”
With these two simple sentences, the CFO of one company is effectively sharing the credit pressure with another CFO. Changing the payment policy puts additional pressure on the vendor to increase their bank borrowings and to increase the timeframe in which this company takes to pay their vendors. An end to this cycle does not seem to be possible in the near term, as the economy continues to experience negative momentum. As a result the accounts receivable DSO (days sales outstanding) will continue to increase, and an associated increase of time to pay vendors. To make this less painful for all parties involved, CFOs are taking steps to improve their partnerships by being open as to why the action of stretching the payment cycle is being taken. Sending a clear message that the steps are not arbitrary and will not be forever goes a long way.
By: Tracy Levine, President, Advantage Talent, Inc. TLevine@AdvantageTalentInc.com