Cash is being spent instead of hoarded, but not on current payables

Cash is being spent instead of hoarded, but not on current payables

A recent article on CIO.com reports that, for only the second time in more than two years, “the corporate-cash indicator from the Association for Financial Professionals shows more finance executives (28%) anticipate cutting their cash hoard in the first quarter than are planning to add to it (23%).”

                Companies Plan to Trim Cash Stockpiles | In a reversal of a two-year trend, US finance executives forecast that their organizations’ cash balances will fall this quarter”..

Even more interesting from the article is what businesses ARE doing with their cash.

Although some are spending on acquisitions, more are paying down debt, buying back shares, and issuing dividends, according to Jim Kaitz, the AFP’s president and CEO. Although that suggests companies aren’t reinvesting in their businesses much, those activities are still better than keeping money in low-return cash-investment vehicles.

Okay, so it is expected that more businesses will utilize that “cash hoard” (if they have one) to pay down debt or issue dividends.  But it doesn’t seem that actually paying the bills on time is one of the things businesses are doing with all that cash.  Rather, the “new normal” when it comes to managing accounts payable is to extend that payment out as far as possible, letting the supplier carry the freight so businesses don’t have to dip into that cash pile to cover costs.

Yet another article on CIO.com, entitled When Your Big Customer Wants to Pay Late, discusses the reality that many companies are extending their trade payables to new lengths, allowing them to keep the money for other uses – essentially using their suppliers for short-term financing.  Viewed as a strategy for building cash reserves, it’s also a strategy which burdens smaller companies who aren’t in a position to carry their larger customers but feel they don’t have the power to negotiate otherwise.

Extending payables may be a way to preserve cash flow, but it isn’t really a cost-cutting measure and could even eliminate some cost benefits.  For example, a supplier may offer a discount for prepayment, and businesses looking to reduce operational costs could benefit from taking advantage of these types of discounts.  In other cases, extending payables could make the business subject to interest or late charges, resulting in either a larger bill or in time spent negotiating the charges down.

While large businesses may be building their cash reserves, or simply preserving them for reducing debt or other uses, smaller businesses should also look at the steps they can take to preserve their own cash flow – whether it is through stronger collection terms and policies, by strategically working with the client to get the payments, or by extending their own payables.

When cash is tight, every business along the supply chain wants to find ways to keep the money in their grip as long as possible.

Make Sense?

J