BOSTON (Reuters) - As the U.S. recession deepened late last year, it took 9 percent longer for businesses to collect money they were owed as customers held onto their cash.
That presented corporate America with a conundrum: Each company’s desire to protect its own balance sheet by holding out on paying bills caused ripples of pain through the economy as other companies made the same decision.
The 1,000 largest U.S. companies took an average of 39.7 days to collect on sales in the fourth quarter, up from 36.4 days a year earlier, according to the data from Hackett Group Inc (HCKT.O) unit REL.
Automakers, homebuilders and makers of durable goods like home appliances faced the most dramatic increases.
“Companies are trying to hold on to cash as much as they can so they’re delaying payments to suppliers, which is having a subsequent impact on the ability to collect receivables,” said REL President Mark Tennant. “It’s a win-and-lose game, really, in that you’re holding on to your payments to suppliers but your customers are holding on their payments to you.”
The amount of time it took to collect spiked higher in the fourth quarter, following the bankruptcy of Lehman Brothers Holdings LEHMQ.PK and the near-lockup of credit markets.
Inventory on hand also rose 17 percent, to 28.2 days worth, from 24.1 days a year earlier.
A preliminary analysis of the first quarter run for Reuters showed that the number of days it took to collect on sales eased slightly to 39.5, while inventory spiked up to 31 days.
“If you make the wrong thing and sales reduce, you sit on it for a long time,” Tennant said.
REL’s analysis is based on data taken from filings with the U.S. Securities and Exchange Commission.
Makers of products used in homes and automobiles — two sectors hit hard by tight credit markets, rising unemployment and falling consumer confidence — saw the sharpest increases in the amount of time it took them to collect.
Homebuilders like Pulte Homes Inc (PHM.N) and makers of household durable goods, such as toolmaker Stanley Works (SWK.N), ended the year with 27 days of sales outstanding, up from 15 a year earlier. Automakers, such as General Motors Corp (GM.N) and motorcycle maker Harley-Davidson Inc (HOG.N), had 21 days outstanding, up from 15. Building products makers, including Lennox International (LII.N) and USG Corp (USG.N), took 40 days, up from 31.
On the other end of the spectrum, airlines — including Southwest Airlines Co (LUV.N) and Continental Airlines Inc (CAL.N) — cut their days of sales outstanding to 10 from 11, while oil and gas companies — including Valero Energy Corp (VLO.N) and Marathon Oil Corp (MRO.N) — went to 32 from 36.
Faced with weak demand and a need to cut costs sharply, U.S. companies including corporate jet maker Textron Inc (TXT.N), satellite-radio provider Sirius XM Radio (SIRI.O) and KB Home (KBH.N) have increasingly talked about making cash flow management a key goal as they navigate the downturn.
“Companies are faced with a real difficulty in terms of it’s very difficult to generate cash, difficult to get cash from external sources or very costly, so everyone is trying to do what they can to manipulate their working capital situation to their best advantage,” Tennant said in a phone interview.
Textron, for one, has reworked the way it pays more than 1,000 of its top executives to tie their bonus to cash flow.
Other companies might consider such a change, rather than relying on simple sales-based goals, Tennant said.
“The conundrum of business in many cases is that you have got a sales force out there that is desperate for sales and who are still primarily measured and motivated by incremental orders,” Tennant said. “It’s very important that finance legislates to ensure that we are doing the right business and not just doing any business.”
Reporting by Scott Malone; Editing by Lisa Von Ahn