After four consecutive months of improvement in our Supply Chain Index numbers the October 2009 Report shows a reversal to levels not seen since early 2009. While this might be a cause for concern, this increase is likely part of a normal seasonal trend that we have tracked for several years now. Corporate slowing of payments to their suppliers is common for companies managing their working capital during the holiday season. The SCI spike, which occurs each fall season, typically comes back down following the increase in cash received during the holidays, as retailers and distributors pay debts owed to the manufacturers.

However, we usually see this cycle of jumps in DBT in November and December—this year we are two months early. The question is why the early move? We could be seeing the impact of big businesses using their market weight and strong cash position to push out payments. Given this growing cash hoard by large companies, the movement in the SCI could be showing a fading confidence in the recovery. Or we could be seeing the effects of tight credit markets for small businesses forcing them to manage their cash flow by slowing payments to their suppliers to make it through the holiday season.

With a mix of news hitting every day it is fair to say the economy is trying to find a steady course. The most recently released October 2009 Manufacturing ISM Report On Business supports the case of economic recovery as manufacturers – the early stage supply chain stakeholders — have increased output ahead of the holiday season and appear to be more confident in consumer spending. Yet today’s bankruptcy of CIT and concerns about consumer spending argue that we are in for a longer recovery. The next few months of data will bring further clarity.

A few highlights from this month’s SCI data:

• Comparing the September 2007 (6.8 days) numbers to the September 2009 (9.56 days) numbers and you’ll see that the Supply Chain Index is ~40% higher
• Commercial accounts receivable debt greater than 30 days past due is also 50% higher than September 2007
• We’ll be watching closely to see if the 2009/2010 holiday season matches past cycles, with DBT quickly dropping back to pre-holiday levels

An article in BusinessWeek’s Turnaround Ace blog entitled “To Improve Cash Flow, Stall Payments to Vendors” is causing quite the reader negative reaction. The gist of the article: You should pay your vendors as slow as possible to help manage cash flow (in good time and bad). For the profiled company in the article they are suffering from extremely slow payment by their customers, so instead of focusing on collecting these payments faster, he is arguing that they should push out their own payments. Here is sampling of some of the reader comments:

“This guy is part of the problem we have with our economy. Wendy and Ted need to stick to their business ethics and demand others do the same. If I slow pay my suppliers, they stop selling to me and send me down the street to the higher priced vendor to slow pay them. If you want good prices, you have to pay your bills.”

“Yeah no wonder the country is in a s#@t storm.”

“This is the worst business advice I have ever read. Period. You want to know the number one problem our business has in this recession? Getting paid in a timely basis for work performed. Want to know why? Because of fine, upstanding people like “Wendy and Ted” who don’t pay their bills on time. I honestly can’t believe Business Week considers this to be great advice.”

“I really couldn’t believe what I was reading…Pay promptly is the best way..and I agree with all the ones who have written opposing the practice of delaying payment..I have been in business a long time …if start off doing it right ..it will work..I disagree with delaying payment unless it is absolutely necessary.”

“Congratulations on writing a column that illustrates one of the many reasons this country is going down the toilet.”

“I agree with everyone else here. This is an atrocious way to conduct business. This will eventually lead to mass layoffs of people. I pay all my bills on time. And if my customers don’t pay in time then I cut them off credit as well. No wonder the banks have cut so many businesses off of credit.”

There is certainly some passion there. As I have blogged about in the past, there is a rough “dual credit crunch” that is squeezing small businesses and hurting their cash flow.

What do you think? Is slowing payments as form of a short-term loan a valid technique? Or is it one of the primary reasons that we are still in a recession?

The good news: The vast majority of your customers and partners are paying their bills on time. The bad news: The delinquent minority is only getting worse.

Having access to the A/R activities of millions of businesses provides us with a unique view into the nation’s cash flow. And since the beginning of the year, we’ve been seeing a steadily improving trend in the amount of corporate accounts receivable debt that is current (see chart 1 below). In fact the vast majority of debt tends to be current – most companies simply pay their bills on time. Even at its worst in February of this year, on a national basis 81% of debt was current. Today that number stands at approximately 83%.

However, companies still must deal with the other 17% of businesses that fail to pay on time. While this number is not dramatically out of line, we’re seeing unsettling growth in the amount of debt over 90 days past due (see chart 2 below). This is not surprising given the well reported growth in amount accounts sent to collections agencies since the recession started, but it is causing finance staff and business owners to be more diligent and get more creative when it comes to dealing with a deadbeat drag.

Have you seen your 90+ days aging bucket growing? Please share a story or two on how you are dealing with this growing problem.

Chart 1: Percent of Current Commercial Account Receivable (US National Average)

Chart 2: Percent of Over 90 Days Past Due (US National Average)

Yesterday we focused on how companies in Nevada have the highest amount of past due accounts receivable debt in nation for the first 9 months of the year, giving the recession weary state another dubious distinction. On the flip side, businesses based in all 6 New England states have maintained better than average – or in this case below the national average – payment behavior throughout 2009.

In other words, New England businesses are among the most reliable in the nation when it comes to paying their bills on time. And at a time with tight lending conditions and strained cash flow, this suggests that these regional businesses are experiencing less economic stress than counterparts in other states.

This month’s numbers are no different (see table below). A quick look at the rankings and you can see that three out of the top 10 are in New England, with the remainder falling in the top 25.

Today we issued our monthly best and worst states in terms of the payment behavior of companies in those states. We started this reporting back in January and one data point has been consistent: the state of Nevada has remained at the top of worst performing states with over 25% of corporate receivables past due (see below). That is over 50% higher than the national average of 16.99% past due and over 262% higher than Alaska the current state with the lowest percent past due. Simply put, companies in Nevada are paying their bills dramatically slower than the rest of the country. Nevada is certainly not alone with Utah and Minnesota not far behind.

Bottom 10 States with Highest Percent of Accounts Receivable Debt Past Due

1. Nevada (NV) 25.55% corporate A/R debt past due

2. Utah (UT) 24.38%

3. Minnesota (MN) 24.02%

4. Colorado (CO) 21.92%

5. Arizona (AZ) 21.64%

6. Wisconsin (WI) 21.37%

7. Hawaii (HI) 20.71%

8. New Mexico (NM) 19.73%

9. Oregon (OR) 19.63%

10. Texas (TX) 19.52%

Top 10 States with the Lowest Percent of Accounts Receivable Debt Past Due

1. Alaska (AK) 7.05% corporate A/R debt past due

2. Maine (ME) 7.25%

3. Kansas (KS) 8.50%

4. South Dakota (SD) 8.98%

5. Wyoming (WY) 10.24%

6. Montana (MT) 10.89%

7. New Hampshire (NH) 11.36%

8. Vermont (VT) 11.55%

9. Louisiana (LA) 12.22%

10. West Virginia (WV) 12.26%

On Monday, the New York Times detailed how the worsening credit conditions are affecting small businesses, as banks take on an increasingly risk adverse approach to lending and credit lines. Yesterday we talked about how small businesses are getting squeezed by increasingly late payments. Today, the Dow closed above the 10,000 mark for the first time in a year, buoyed by better than expected earnings from a few bellwethers and early signs of improving consumer confidence. The common thread in all of these events? Conditions do indeed seem to be improving for many of the nation’s large businesses. Unfortunately, a dual credit crunch conspires to thwart similar growth by the small businesses that make up the majority of the nation’s jobs engine and 50% of the GDP.

The NY Times article covered the familiar credit crunch: small businesses can’t get the loans and credit lines they need to expand operations, grow payrolls and pay their bills. In contrast, Cortera’s new Small Business Index™ focuses on the other side of the credit coin: Trade credit. Trade credit focuses on payments terms and behavior for advance products and services (e.g. inventory) – and more specifically cash flow.

What is interesting is that big companies are forcing their smaller customers to pay them faster, yet within our SBI we can see that these same small businesses now are taking longer to pay everyone else. And the Times reported, “As the financial crisis has largely eased in recent months, big companies have found credit increasingly abundant, with bond issues sharply higher.” Thus large businesses have been largely immune to the dual credit pressures facing small businesses.

To understand this dual credit crunch and its implications, one need look no further than cash flow. Many small businesses live under a tight cash conversion cycle so if they are pushing cash out the door quickly for one class of suppliers (big companies), but not being paid quickly enough by their own customers (other small businesses) then they can’t pay their own bills. Given that small companies have less access to other forms of lending (the larger credit crunch) that once they get behind it’s hard to catch up and harder to reinvest in business growth.

You can see how this starts to spiral if small businesses can’t tap other sources of lending to manage these cash crunches. Small businesses lack a financial cushion that large businesses enjoy through alternative cash sources like securitizing accounts receivable, new bond offerings, and new equity. Their only choice for a short term loan is to use their suppliers and stretch out payments. Essentially small businesses end up paying their smaller suppliers (that likely have less clout) more slowly as a form of a short term loan until more cash comes in the door (or they have to make cuts in other areas with layoffs, reduced hours, less inventory etc…).

The all too often result is, at best, little investment in growth (new products, hiring, expansion) and at worst leads to even more cost cutting (pay freezes, reduced hours, layoffs or even closures).

Such conditions require far more diligence when it comes to evaluating the credit viability of business partners and customers, and they require keeping a close eye on the changing payment behaviors of existing partners to detect early signs of risk.

As a small business owner, how are you managing this crunch? We’d love to hear your story and tips for surviving.

A few weeks ago, The Wall Street Journal explained how small companies are getting paid more slowly by their large company customers while those same large companies are forcing the little guys to pay faster. Well, Cortera’s data is showing that the little guys are getting paid more slowly by their small business customers, too.

Our Small Business Index (SBI) shows that while small businesses (companies with less than 500 employees – the SBA definition) are improving, but they’re paying 25% slower than a year ago and 20% slower than the overall business average. It is also important to note the widening gap between big companies and small companies. Pre-recession, the measures for the average, small and big companies tracked in a tight range, but since late 2008 we’ve seen a significant gap open up. Small businesses have a 55% higher DBT than large companies.

This is a dangerous situation for small businesses and a bad trend for the economy as a whole. When the payment flow between small businesses slows, the resulting friction impedes their ability to plan, grow and sometimes even survive.

As covered in past Cortera SCI reports, confidence in sales normally spurs companies to grow inventories with the belief that they will be able to move those goods in the future. Cash flow to suppliers tends to tightly match the demand for their goods by the end customer. In a healthy economy companies are paying their suppliers in a timely manner as those inventories are efficiently sold to customers. In a poor economy, companies tend to slow payments to suppliers as inventory sits on the self to help manage their working capital.

Cortera’s Supply Chain Index (SCI) measures the relative health of this flow of cash to suppliers. The most recent Cortera SCI figures indicate that, while there remains more payment friction than a year ago, confidence in sales may be starting to return to more normal levels. A few trends continue from our last report in the September analysis of business accounts receivable data through August 2009:

• The amount of late A/R is decreasing. In August, the amount of A/R in the SCI more than 30 days past due fell to 10.05%, approaching levels not seen since October of 2008, an improvement of nearly 23% from its peak level in December 2008. This represents nine straight months 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.
• Late A/R, now standing at 20.9%, has also flattened out and is hovering in the ~21-23% range over the same nine month period—well off the December 2008 high of 27.1%, and nearly in line with the pre-October 2008 run up.
• With the SCI Days Beyond Terms (DBT) now standing at 8.56, on a year-over-year basis, DBT has worsened by nearly 15%. Still, with nine months of improvement behind us and a drop of by over 20% since the December 2008 peak it is clear that cash flow is improving and confidence growing.

What a great day at DEMOfall 09! Today, we unveiled a fundamentally new approach to commercial credit reports by adding the real-time voice of the business community. Are you a small business owner? A finance manager at a Fortune 500 company? Or a veteran credit pro at a company somewhere in between? The Cortera Credit Exchange might just be the information solution you’ve been looking for.

Credit Decisions are Now Social

Join the first community dedicated to making the flow of business credit information as free and widely available than ever before. We’ve taken a basic commercial credit report, put it online for free, and then made it social, creating the first website where you can share your customer payment experience with other decision makers. Just like the many consumer and business online communities you’ve come to rely on every day, you can join for free, glean insight from user reviews, and even write a few of your own.

Harness the Power of Thousands of Credit Professionals

The Cortera Credit Exchange brings together the collective wisdom of the commercial credit community. In a few clicks, you can join Cortera and get ratings from your peers–giving your direct access to the type of information you’ve always wanted. The community brings online what already is being used daily in conference rooms, on the phone and over lunch. You’ll find timely reviews on businesses of all sizes, and you can even add your own review to provide your unique insights.

What’s the Catch?

There is no catch. We believe strongly that the commercial credit reporting system is currently broken and can be improved through the flow of free and drastically lower priced premium information. Want a traditional credit report? We have those too, just at price that might surprise you. Need corporate family information, business scoring on many businesses or business demographic information? We’ve got you covered.

The basic credit report information and community is free to use. It’s that simple.

Join the Community Today – It’s Free

Leverage the collective experiences of credit professionals, business executives, and owners like you to make better decisions. Getting started is easy and won’t cost you a thing—all you have to do is register.

Tell us what you think. We’d love to hear from you.

In case you missed it, there was a great front page article yesterday in the Wall Street Journal entitled “Big Firms Are Quick To Collect, Slow to Pay” about how, you guessed it, the biggest companies are speeding up their collections efforts while slowing payment to their small business partners. In essence big companies are squeezing the little guys, slowing the flow of cash to small businesses while at the same time requiring these companies to more rapidly pay their bills. This helps the big guys build their cash position, but strains the cash flow of small businesses. There are several examples in the article of bigger companies pushing out their payments to their smaller suppliers simply because they can, a trend that’s to be expected. But the article and trend raise bigger questions. With over 20 million small businesses in the US, could the credit actions taken by the largest 1% of companies temper the reinvestment and expansion activities so vital to fueling a tentative recovery? By withholding cash from the small businesses who most need it, is big business, inadvertently, prolonging the credit crunch — or at least passing along the pain?

The analysis by REL Consultancy, a division of the Hackett Group showed that “Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers and trade creditors in the second quarter, up 5% from 53.2 days a year earlier, according to REL. They also collected faster on their bills, taking an average 41 days versus 41.9 days a year earlier. Businesses with less than $500 million in sales paid vendors in an average 40.1 days, down 6.5% from 42.9 days, REL found. They took roughly 8% longer to collect payments, or an average 58.9 days, versus 54.4 days a year earlier.”

Has this practice started to impact your business? Are you getting squeezed by your biggest partners? Seeing shortened cash cycles? Have best practice tips for dealing with such practices? We’d love to hear from you.