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U.S. public companies are holding back payments for an average of 56.7 days, longer than any point in the past decade, according to a study

https://www.wsj.com/articles/delaying-payments-to-suppliers-help-companies-unlock-cash-1530178201?mod=cx_picks&cx_navSource=cx_picks&cx_tag=undefined&cx_artPos=5#cxrecs_s

Summary

This articulate highlights trends in U.S. to increase and maintain cash flow. More specifically, it discuss how firms are leveraging their relationships with their suppliers to extend payment terms as a strategy to free up cash so that money can be used to increase shareholder value. In one example a firm used the extra cash flow to help finance an acquisition of another company. The article discusses some of the specific techniques these firms are using. And it provides a summary on how payment terms are impacted as well as the estimates of the amount of cash conserved by employing this practice. The article also discusses topics such as inventory management and its role in a firm's free cash flow.

Key points

This practice enables firms to avoid the cost of borrowing from banks by essentially making your supplier be a financier of your business

The modifications to payment terms to vendors and suppliers are increased in small increments, but done consistently over the years

While extending payment terms on Accounts Payable has be successful, focusing on inventory management offers a considerable opportunity for many firms. This that opportunity estimated to be in excess of $400 Billion dollars.

Analysis:

I found this article to be fact based. The authors relied on a soon to be released study by the Hackett Group that focused on this topic. The writers provided facts and quoted statements made by managers of different firms. I was unable to find any evidence of speculation in the article. Nor did I find the writers to be biased. Ive assumed the writers relied on the study in their summary of the economic impact of this practice and therefore I refrained from judging the accuracy of their stated figures. I found no faults in their reasoning, because again, the article focused on summarizing the findings of a study. I did find it interesting that the article was presented as focusing on Delaying payments to suppliers, but a fair portion was dedicated to inventory management and the potential positive impact to a firms cash flow. I thought the article was well written and informative. My overall conclusion is this trend of delaying payments will continue by large public firms. And the specific techniques used will likely be adopted by smaller businesses as well. Finally, I believe the use of data analytics to improve the efficiency of a companys inventory will become a best practice.

Questions:

1) Is there a breaking point? In other words, do you foresee a time when suppliers will be unwilling to continue to extend payment periods to their customers? If yes why, if no why not?

2) One of the drivers to adopt this approach to managing cash flow was to avoid the increase in the cost of borrowing. Do you concur that the cost of borrowing is rising? Why do you believe that? And if you were a lender, what recommendations would you make to compensate for the decline in revenue at your firm?

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