Sunday, January 25, 2015

Cash Management - Now More Important Than Ever

This Blogger CEO has written that Cash Is King.  That adage is now more important than ever because many multi billion dollar corporations have as an objective delaying payment for goods and services as long as possible to work off their supplier's money.  It is certainly not that they can't pay sooner, but rather that they want to maintain the float on funds as a source of income for their firms.   This is understandable; but is it wise in the long run.  Procurement Departments are very focused on payment terms seeking longer and longer days, or even months to pay for the goods and services they are receiving.  In many ways, it is just a game because it can force supplier's to use their credit lines, assuming they have them, to fund operations.   When that happens, well run companies must factor the cost of funding into pricing, so in the end the client is paying for delayed payment terms one way or another.   Many clients may not care, even if it results in higher fees and even interest charges because they assume that their money can be better invested in other ways. 

This trend particularly hurts smaller companies that may not have access to credit lines.  Once they have delivered goods, or implemented services, they often cannot afford to float the business for a big client.  As such, they might have to decline the business.  In the end, it hurts big clients because less competition will usually result in higher prices.  In addition, smaller companies are often more flexible and more innovative than bigger companies, so what the client may find over time, is less flexibility and higher prices as the trade off for longer payment terms. 

All companies need cash in the door as soon as possible to fund operations.  So the goal of every supplier is the shortest payment terms possible.  That could mean 30, 45, 60 or 90 day payment terms; but usually not longer.  In some cases, suppliers may provide a discount for quicker payment terms, recognizing the cost of money.  Whatever the arrangement, this is just squeezing the balloon.   It would be a fool's game to assume that longer payment terms do not impact the price of goods and services, one way or another.  Failing to properly manage cash is a road to bankruptcy.    

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