Banking & Finance and Debt and Small Business

Firms put off paying, despite easing financial pressure

January 29, 2011

Pity Heidi Brumback and myriad other small-business owners like her. More than a year after the end of the recession, Brumback’s customers still put off paying their bills, and her vendors still clamor for their money.

Receivables for her Hoosier Equipment Service Inc. averaged about 60 days before the recession; now, the “float” has swelled to 100 days.

Brumback is waiting nearly twice as long for her money because the environmental consultants who use her firm to haul away contaminated earth are being paid later by general contractors, which are being paid later by property owners and developers.

The Zionsville businesswoman understands her customers’ predicaments. She nonetheless feels she has little choice but to delay paying the landfills and the companies that haul in fresh dirt.

But Brumback hasn’t been able to shift enough of the shortfall to avoid giving herself a salary cut and carrying out the company’s first layoff, albeit a small one.

“People are short on cash, with the economy,” she said. “You’re working a lot harder to make less. We’re in survival mode right now.”

If there’s good news for recession survivors, it’s that the trend toward longer receivables appears to have leveled off.

What’s less clear is how soon—or even whether—receivables will return to the 30 days that was standard for most businesses before the recession began in December 2007.

A spot check of Indianapolis-area accounting firms reveals that companies of all stripes are still putting off paying bills as long as possible to conserve precious operating capital.

R.J. Pile & Co. LLC Tax Director Carol Howard has watched the benchmark rise to 45 days, and Larry Greenwalt, managing partner of Greenwalt CPAs Inc., is seeing a lot of 50-day receivables. In some cases, particularly in construction, he said, the lags extend to a ripe 120.

The economy clearly fueled the trend. But Greenwalt believes hard times only accelerated a practice that took root a couple of years before the recession of businesses’ using their vendors to replace or supplement bank credit lines.

As small companies scratch together operating capital, they confront a delicate dance with customers. Push too aggressively, and customers might take their business elsewhere; wait passively, and the check might never arrive.

Howard said businesses with the best track records of getting paid establish relationships with customers: “The more you know the person you’re doing business with, the more you’re going to cooperate and pay your bill on time.”

Allowing receivables to languish too long is risky. Banks typically consider bills unpaid for 90 days or more uncollectible.

Hoosier Equipment Service cut costs across the board and saw costs fall even further when two longtime managers left and were not replaced.

Compensating for the lengthy receivables by bidding projects at higher prices isn’t an option, Brumback said. So many companies are hungry for work of any kind that low-ball proposals have become the norm.

Not every small business is still in the wringer.

Robb Fine, co-owner of Fine Promotions Inc., also in Zionsville, saw his receivables climb from an average of 39 days before the recession to about 47 days during the toughest times, then recede to 39 late last year.

The company, which puts company logos on such items as luggage and crystal, survived by cutting strapped customers some slack when times were toughest, but also by watching receivables like a hawk.

“It’s all about the practices you do,” Fine said. “If you allow [customers] to stretch you, they will.”

Uncertain future

Whether receivables return to old standards remains to be seen.

Greenwalt, the CPA, sees a leveling off and expects the new normal to settle at about 45 days. He sees no evidence of 30 days making a comeback.

Howard sees receivables as a “lagging indicator” of the economy. Businesses will pay on time only after they’re flush with money and feel they can afford to.

Paying late isn’t the right thing to do, she said, but added that companies will take advantage of slack as long as they can get away with it.

“Just the nature of things, it’s going to be a while before things, if ever, go back to 30” days, Howard said.

However, another observer predicts a swing back to 30 days within a couple of years.

Mike Brittian, president and chief operating officer of the Great Lakes region of the National Association of Credit Management, a not-for-profit of businesses offering commercial credit, said the number of days needed to collect on invoices could shrink surprisingly fast as the economy improves.

Already, the average size of receivables placed with a collection agency operated by the organization has begun to wither. The average in Indiana peaked at $2,773 in 2008 and then dropped steadily to $2,350 last year, Brittian said.

As the recession wore on, surviving businesses collected larger and larger contracts, then some of those companies went sour, driving up the amounts sent to collection agencies, he said.

Now the size of those placements are in retreat, and the size will continue to shrink as the economy improves and new businesses begin to nab contracts.

Ultimately, the improved economy will position businesses to demand prompt payments from customers.

“It’s yet to happen,” Brittian said, but “it can go fast.”•
 

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