Supply Chain Confidence Returning?
June 8th, 2009 by Jim Swift
The flow of money through the supply chain is as crucial as the flow of goods. While the flow of goods is driven by sales, the flow of money is largely influenced by a company’s confidence that those sales will continue. Strong confidence in sales normally spurs companies to invest in growth initiatives. On the other hand, a lack of confidence in sales causes companies to conserve cash and slow payments to suppliers.
Cortera’s Supply Chain Index (SCI) is a measure of financial confidence. The most recent Cortera SCI figures indicate that, while there is clearly more accounts receivable stress than a year ago, confidence in sales may be starting to return. Two interesting trends are emerging in the latest analysis of accounts receivable data through April 2009:
- The amount of late A/R is decreasing. In April, the amount of A/R in the SCI more than 30 days past due fell to 11.0%, an improvement of nearly 16% from the December 2008 level. This represents the fourth straight month of improvement over that high water mark. Payments more than 30 days late are often the equivalent of missing a payment. That’s a marked change in financial behavior that can signal dramatic changes in a company’s financial situation. An improvement in this measure suggests a return to normalcy and financial stability in companies.
- The age of late A/R is decreasing but not as fast as the amount. April’s overall Days Beyond Terms (DBT) for the SCI also improved but to a somewhat lower degree (13.8%). So less A/R is more than 30 days past due but overall late debt continues to increase in age. This implies that companies are not missing payments as often but are guarding cash while they monitor inflows.
Even with these improvements, the current A/R performance profile is significantly below than that seen prior to 4Q08. On a year-over-year basis, DBT has worsened by nearly 34%. Will these signs of returning confidence prove to be the start of a recovery or just CFOs taking a breath after a hard fall?
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