Big Firms Are Quick to Collect, Slow to Pay

One of the oldest international proverbs, “Big fish eat little fish”, rears it’s head during the 2008 financial crisis in no place other than our beloved receivables and payables turnover ratio. According to an analysis conducted by REL Consultancy for the WSJ, “survival of the fittest” held true even in the corporate world, as  shown by the changes in collection time frames between the 2008 and 2009 fiscal year.

Power play by larger companies

For the fiscal year 2009, large corporations ($5 billion or higher in annual sales) on average collected accounts receivables 2% faster than the prior year and paid accounts payables 5% slower. Smaller corporations (less than $500 mil in annual sales) on the other hand collected accounts receivables 8.3% slower, and paid accounts payables 6.5% faster (on average).

Since most of these collections are tied to each other in B2B exchanges, the biggest companies are flexing their financial prowess at the expense of smaller companies. The implications of this are two fold. First, there is a loss of money. As the concept time value of money has proven, money earlier is better than money later. Paying slower and collecting faster, albeit only a few days or weeks, can account to significant amounts of interest in large transactions. Second, there is a disturbance to business flow integrity. Most smaller companies do not keep large amounts of cash on-hand, their business model implicates their survival on day to day cash inflow/outflows. Disrupting this model by forcing smaller companies to pay sooner and get paid later can cause cash flow problems that requires outside assistances in the form of short term loans. (Unfortunately, much too similar to how most Americans live their lives but this is a different topic all together.) Sometimes the middle-of-the-line companies can be affected the hardest, because they are dealing with both larger and smaller businesses, even if they have some financial muscles versus the smaller businesses, they spend significant amount of resources negotiating between both sides.

We have to keep in mind however, that larger companies do not often have complete free reign to impose their terms on smaller counterparts. They have to do so with a certain amount of finesse. Pushing too hard might cause the smaller companies to find other business partners, cause significant loss of faith which may affect relationships in the future, or worse yet, drive the smaller companies out of business. The latter can affect the larger company as well, slowing down their business and forcing them to find new partnerships.

At the end of the day, no matter how much balance or respect businesses have for each other, it will always be the smaller businesses that lose out in times of economic turmoil. No doubt Darwinism applies to corporations as well.

source: http://online.wsj.com/article/SB125167116756270697.html?mg=id-wsj