Friday, March 08, 2013

Why bills are paid so slowly these days

No, not the ones you receive directly from your creditors.  Those still need to be paid in a month or less, as you are most likely one of the little people.  I'm referring to the very common practice of companies shifting payment of bills from the previously common "net 30" (pay balance in 30 days) to "net 60", "net 90" and (my favorite) "fifth third" (pays on the fifth day of the third month after receipt of product). 

The typical reason given for such arrangements is optimizing cash flow and reducing the cost of inventory, but let's take a look at real life.  GE is competing with Emerson for shelf space at Wal-Mart or Target.  Will either Emerson or GE eliminate their chances for Wal-Mart shelf space by insisting on net 30?  Of course not.

So what we have here is manufacturers paying for, and getting paid, on about the same basis; let's assume it's net 90 for everything but wages, or about half of your costs.  So the end result is that with the extended payment plans, the company ends up carrying about a month's expenses on credit, or carries an extra month's worth of cash on hand. 

Now this isn't a complete loss, as typical inventory turns can be as low as four or lower, but it is a nice little subsidy for the bankers.  So why do companies do it?  They don't like paying interest any more than you do, after all.

Enter Sarbanes-Oxley, which requires accurate quarterly financial reports and provides for jail time for executives who file false reports--and indirectly provides an incentive for those same executives to have a good idea exactly what revenue and expenses will be before the quarter ever starts.

Which is exactly what net 90 financing does, and "fifth third" comes close.  By pushing bills out three months, these tools give accountants the tools to get it right and avoid ruinous SEC investigations.

So if you own a small business, and you're wondering why you're not getting paid in a timely manner, yes, it is the government's fault.

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