Now Credit Crunch, Next A Cash Crunch?

Although much of the focus nowadays is on the financial problems at lenders and brokers, they are not the only ones getting squeezed by the bursting credit bubble and a cratering economy. Companies that aren’t necessarily in the money shuffling business are also discovering that the operating environment is suddenly a lot more challenging. Spending is under pressure, and so is liquidity. According to a report in Financial Week, “Customers Taking a Lot Longer to Pay, Squeezing Corporate Cash Flow,” a crunch may be looming.

Average DSO now at 41 days and counting; companies may be forced into inhospitable debt market to fill gap

U.S. companies are not getting what’s coming to them as quickly as they once did, a recent study shows. And that suggests that corporate cash flow growth is becoming more difficult to sustain as the economy slows.

Days sales outstanding (DSO), or the amount of time receivables are outstanding, for the top 1,000 U.S.-based public companies, excluding financials and automakers, increased to an average of 41 days in 2007, up from 39.7 days in 2006, according to the survey by consulting firm REL.

Forty-one days outstanding is the highest average since the last economic downturn in 2001, REL said. And looking forward, the trend doesn’t look good.

“We are seeing no improvement” in the second-quarter numbers, Karlo Bustos, an REL financial analyst, said. “You never want to see that number get worse. As companies start to process through their cash conversion cycle, if you are not receiving money quicker than you have to pay your suppliers, you ultimately have to go to the debt markets to cover that.”

And given the state of the credit markets generally, he added, that could be dangerous.

“It’s only going to get worse for companies who look to the banks for credit.” Mr. Bustos said. “You’re going to have to look at your own efforts internally to improve your liquidity.”

Industries which demonstrated a noticeable increase in DSO in 2007, on average, included IT services, which showed an 11% increase; computers and peripherals, up 8%; and electronic equipment and instruments, up 15%.

Though the difficult economy may lead companies to hold on to cash longer, it’s crucial to fight the trend, REL analysts suggested. Some of the specific ways companies can improve DSO, said Mr. Bustos’s colleague Peter Rabjohns: optimize collection efforts by focusing on the highest value customers. And, he said, “Make sure they pay on time. Manage credit terms to the lowest possible terms you can,” not just in the U.S., but globally, he said.

Though days sales outstanding was a noticeable negative in this year’s REL study, overall, days working capital (DWC) showed a small improvement, coming in at 38.2 days on average in 2007, up 0.4% on an annualized basis from 2006. Sixty-one percent of industries improved DWC last year, including consumer services, telecommunications services, health care, and construction and engineering.

Posted in Categories: Contributor, Economy, External Research, USA.

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