Collections and Payments with Big and Small Companies

The Wall Street Journal worked with REL Consultancy to conduct an analysis on collections and payments. Large companies—defined as earning over $500 million in sales—work to collect fast (average of 41 days) while they tend to take their time paying (average time of 55.8 days). Companies earning less than $500 million do the opposite: pay on time (40.1 days), wait for cash longer (58.9 days).

Why Big Companies Control Payments and Collections

Big companies find they need to do what they can to hold on to their cash longer while bringing in more faster to cut down the need to get funding or deal with expensive bank lines. "The cash they save can be used to pay off debt or be invested in other parts of the business," reports Serena Ng and Cari Tuna in Big Firms Are Quick to Collect, Slow to Pay.

The situation is clearly one of survival of the biggest and fittest allowing the big companies to take advantage of the smaller companies. The article says that Anheuser-Busch Cos. has informed its vendors that it might take 120 days to pays rather than 30 days as done before. General Electric, Procter & Gamble and Hertz have also taken steps to manage their cash flow in collecting on their payments as fast as possible.

Importance of Cash Flow Management

The process of holding on to cash longer (delaying payments), collect payments on time and watch their inventory gives them a way to ensure they have the needed cash flow to reinvest in the company. Unfortunately, this approach could put their suppliers—that wait longer for their payment—out of business.

Suppliers still have to make payroll and pay their own bills. When cash doesn't come in, they can't make payments. That's why timing plays a critical role in cash flow management. However, big companies need to remember that putting their vendors out of business also impacts their own company. They'd have to seek out another vendor, do their due diligence, pick the vendor and negotiate the contract. This process doesn't happen fast.

Dealing with Slow Payments and Fast Collections

So what is a company to do when they have little control in the payment and collections process? One company works harder to manage its payment planning schedules. They also investigated their big customers to see how they can speed up payments by contacting the right people in the right department.

This is where relationship building can become valuable. When you connect with vendors and customers, they might be willing to move your business to the top of the list for paying or give you more time to pay bills.

Another company relied on its credit line to survive cash flow problems. These situations may call for invoice financing where you can sell your accounts receivables to a lender at a discounted rate. While you won't get paid for the full amount, you at least speed up receiving cash instead of waiting another 45, 60, or often many more days.