One in nine businesses is likely to experience severe financial distress in 2009, according to Christine Christian, the chief executive of debt collection and credit reporting agency Dun & Bradstreet.
Christian says D&B’s latest quarterly analysis of payment terms indicate a large number of companies are facing cashflow problems as the economy slows. Businesses averaged 56.5 days to settle accounts in the December 2008 quarter, the highest level recorded since 2001 and an increase of four days over the last 12 months.
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“Trade payment terms are the most predictive element when it comes to forecasting business failures,” Christian says.
“Cashflow has now stepped up as the one area that is going to be decider as to which businesses fall over and which businesses survive. Small businesses particularly have now hit the wall when it comes to cashflow.”
The analysis highlights how big companies employing more than 500 staff are using their market power to turn the screws on suppliers by pushing out payment terms to 61.5 days, more than double the standard term. Payment terms for big businesses have blown out by 2.2 days in the last six months.
Christian says this is an intentional strategy from most big companies, who have moved quickly to ensure their cashflow remains strong.
“Big businesses have got the where-with-all and the understanding of the value of cash and they act far more quickly than small businesses. They are generally much better at collecting overdue receivables and managing the payment sequences,” she says.
Small businesses continue to be the fastest payers, with payment terms for companies with six to 19 employees at 53.7 days, up one day in the last quarter.
Firms with 200 to 499 employees had the biggest quarter-on-quarter increase, up 2.5 days to 58.6 days.
Christian says companies need to put cashflow management at the top of their priority list of risks of going under.
“If you don’t heed the warning that cashflow is everything and act accordingly, you are going to be at the back of the queue.”
She says companies need to tighten their contract terms where possible and lay out the consequences for late payment and make sure they start following up overdue invoices as quickly as possible.
“You’ve got to be at the front of the queue.”