Where's My Check?

Corporations are getting cute with accounts payable, forcing small suppliers to wait and wait. Here's how to take action

Large corporations are increasingly slowing payments to their vendors, a new survey shows, and the problem tends to worsen as the calendar year draws to a close. Many small suppliers don't realize they can employ a number techniques to reduce the lag time in payments from larger companies, says Andrew Ashby, president of the Americas for REL Consultancy Group, a British firm with U.S. headquarters in Purchase, N.Y., which conducted the study.

Smart Answers columnist Karen E. Klein recently spoke with Ashby about his company's findings -- and how small companies can fight back against late payments. Edited excerpts of their conversation follow:

Your firm's 2005 Working Capital Survey of the top 1,000 U.S. companies shows that more than half took more time to pay their bills in 2004 than they did in 2003. In fact, the number of industry sectors paying suppliers more slowly than the year before jumped from 45% in 2003 to 65% in 2004. And the number of individual companies paying more slowly jumped from 46% to 56%. Why is this happening?

We believe a lot more large businesses are turning to the payables side of their financial equation to manage their working capital. Basically, they're squeezing suppliers in order to improve their cash flow and working capital. The standard payment term used to be 30 days. Now, 45 days is acceptable, and 90 days is being pushed in some sectors.

From our experience, clients find payables the easiest thing to manage, so they fall back on manipulating them as the lever that's easiest to pull. Inventory and receivables take time and effort to manage, while payables are the one thing completely under the companies' control. They can stop checks, or they can change the terms with their suppliers at the drop of a hat. The result is that the smaller players find themselves being pushed around.

Your survey shows that the pushing tends to get particularly rough in the fourth quarter. Why is that?

The yearend gamesmanship gets worse because companies are manipulating their numbers for annual reports. Our survey showed that, come mid-December or even earlier, companies simply stop writing checks.

Does manipulating their payables work for large companies wanting to increase working capital?

It might provide a temporary improvement in working capital and improve cash position in the short term, but the practice actually can be damaging in the long run.

Small companies have a cost of capital around 10% and upward, where larger outfits' capital costs are more in the 5% to 8% range. And what happens when big companies force small suppliers to act as their banks is that the small company has to pass the cost on by raising prices, or go out of business.

Do small companies simply have to accept this situation, or can they adopt strategies to speed up payment without incurring any bad feelings?

There are definitely solutions, but it seems that many small companies don't realize it. Our research shows that only about 2% to 5% of suppliers actually push back when their payment terms are lengthened.

It's rather amazing that small businesses think they just have to take it. And even the larger companies are shocked by how little push back they get, even when they're changing contracts midway through.

What do you recommend small companies do, in practical terms?

They can offer discounts for shorter payment terms, particularly if their corporate customers come to them and want to lengthen a payment term from, say, 30 days to 60 days.

What they ought to do is figure out what their financing cost is going to be for that additional 30-day period -- and then come up with a discount that makes sense. So if it costs the company 1.5% to finance those extra 30 days, they'd be better off offering a 1% discount and enticing the customer to pay in 15 days.

Aside from offering discounts, any other strategies?

Sure. This one is slightly harder, but it offers more long-run benefit: Think about how your small company can position itself better within the supply chain and make itself more strategic and collaborative.

So when a small business is approached about extending its payment terms, rather than capitulating and considering it an inevitable cost of doing business, it can negotiate.

The small supplier might say: "We just can't extend your terms, because that will put us out of business or force us to pass on the cost to you. But why don't we sit down and figure out how we can work together more efficiently?"

It sounds like you're recommending a change in mindset as much as anything else.

Yes. Small companies need to be a little smarter, a little more confident, and position themselves more as a partner and less as a commodity. Everybody's looking for greater efficiency, and large companies are going to continue to take advantage if there's no resistance.

When a company says: "We're not supplying you anymore, or we're stopping shipment if we don't get paid in a timely manner," that's vital. One part missing can shut down a manufacturing line.

What can small companies do right now to avoid a long payment drought at the end of the year?

From a housekeeping perspective, they should manage their current credit exposure and start putting extra focus now on their receivables to keep them as current as possible. That means getting on the telephone and securing payment dates and promises to pay. This might be a good time to offer a discount so they can clear their larger balances.

What they shouldn't do is wait and call up a company after its payables department closes in mid-December, or engage in extending anybody's terms now.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Before it's here, it's on the Bloomberg Terminal.