Later customer payments and slower moving inventory have combined to tie up private-companies' cash 16 percent longer than just three years ago, according to new data from Sageworks Inc., a financial information company. That's money companies don't have in the bank to hire or buy new equipment, even though sales and profit margins this year are up.
Sageworks conducted a financial statement analysis of private companies across all industries and found that the average age of companies' accounts receivable has increased to 29.02 days this year from 22.83 days in 2009, a 27 percent increase.
Meanwhile, the number of days inventory stays in the system has risen 16 percent, to an average of 23.82 from 20.49 in 2009. Inventory days is a ratio showing the length of time between the purchase of raw materials and the sale of finished goods.
"Their cash is tied up in inventory as well as receivables, and that has a significant effect on cash flow and consequently, a significant effect on how much they can use for capital expenditures or new jobs," said Michael W. McNeilly, Sageworks' director of advisory services.
To be fair, companies in Sageworks' analysis have slowed their own payments to vendors. The average age of private companies' accounts payable examined by Sageworks is 27.32 days this year, compared with 21.33 in 2009. That 28 percent increase could be a result of the longer cycle for receivables, McNeilly said.
"Payables have jumped in the last three years," he said. "This tends to be a natural step for business owners to maintain some level of liquidity when struggling to pay their bills."
Taking all three metrics into account, private companies have cash tied up for an average of 25.52 days, compared with 21.99 days in 2009. That's a difference in the cash conversion cycle of 3.5 days, or 16 percent.
Obviously, cash trends can vary by industry and other factors. And the average accounts receivable days and the average inventory days have each increased to a smaller degree this year than in 2011. Nevertheless, these follow sizable jumps in 2010 and 2011.
"So far this year, companies on average have seen a smaller increase in accounts receivable days, which is hopefully a positive sign that business owners are getting a handle on the receivables," McNeilly said.
It's unclear what effect the longer operating cycle has had on employment at private companies, which drive more than 50 percent of GDP and more than 65 percent of new jobs. Accountants, bankers and other professionals who work closely with private companies say their clients aren't hiring more quickly because they're too nervous about the future, according to a recent Sageworks survey.
But McNeilly noted that a longer operating cycle can make business owners more conservative about future spending, even when sales and profit margins are improving.
"Regardless of how much revenues increase, if cash is tied up, that's going to influence how one is willing to grow a business," he said. "In this scenario, a business owner might not have the same cash in the bank that's reflective of the revenue growth."
Follow Mary Ellen Biery on Twitter: www.twitter.com/@sageworksdata
WHAT A MESS!! WE JUST ASSUMED THAT THE $150.00 THE COMPANY DEDUCTED REPRESENTS THEIR GUESSTIMATION OF 'OVERTIME' CREATED BY THEIR COMPANY'S STAFF DECISION. WE TOOK THE MONEY AND RAN. IT WILL BE A COLD DAY IN H#@L BEFORE WE WORK WITH THIS COMPANY EVER AGAIN ~
AND, THAT IS THE PROBLEM WITH WORKING WITH MULTI-MILLION DOLLAR COMPANIES. THE SMALLER BUSINESS GUY DOESN'T SAY TOO MUCH AS HE WANTS THE CONTINUING BUSINESS OF THE BIGGER GUY, SO HE CHOKES DOWN A LOT OF CRAP.
FIRST, WE GOT THE EXCUSE OF - "OH, WE DON'T HAVE YOUR S.S.#" (30+ DAYS OUT); THEN, WE GOT A PHONE CALL - "WE'RE GOING TO PAY YOU IN ANOTHER 30 DAYS" (60 DAYS OUT). THE CHECK FINALLY ARRIVED AT 101 DAYS OUT. . . . . . .
Basically we bailed out the Banks, and we got NOTHING in return. Actually in my opinion we got worst than nothing, because they did the opposite of what they would normally do after they got the taxpayers money. NOW we need to bail out the people, the Bank Bailout didn't work, but the people bailout always works, and will always work, and that is the FACTS!
Centuries in fact.
It's always a handly little trick for companies to not pay their bills for a few months, which leaves them a big stack of cash to point at to impress investors.. all the while hiding the accounts payable side of the books. Happens all the time. And some just tell you flat out.. "We are rolling our accounts payable back another 30 days. Take it or leave it." This, after already rolling it back an extra 30 or 60 before that.
Now, for fellow business people to read this, it's no big news... but for John Q. Consumer.. they have no clue. Nada. They just figure that since they are forced to kiss a boss's butt all day long for a wage (that the law requires is paid on time) that those of us who are self-employed are just rolling in hefty cash and fat times. LOL.. yeah.. right. They are clueless... totally and completely clueless.
How would you handle paying this debt along with my fuel oil bill from this past winter when a person is on unemployment and took his SS at 62 ??? Now this should come pretty easy for you Mary and I look forward to your response asap...And please tell me how to run my car on water since I am a little short on the real struff..Thanks again Mary and keep-up the insanity....