Feel sorry for Peter. He is the one, of course, that businesses borrow from in order to pay Paul.
But that is actually what businesses are doing. According to a survey from KPMG, customers are negotiating longer credit terms with suppliers.
Meanwhile, suppliers are responding to the financial crisis by tightening on credit terms.
Let’s run that past you again. Suppliers are demanding tighter credit terms: customers are insisting on extended credit terms.
Let’s introduce a third party – call him Simon.
Simon is trying to delay paying Peter, so he can pay Paul instead. Meanwhile, Paul owes Peter some money, which he needs from Simon first.
And we haven’t even told you about what Mark is up to yet.
According to KPMG, around half of respondents to its survey said they are negotiating longer payment terms with their suppliers. Consistent with this finding, 92 per cent of respondents said their customers were attempting to stretch payment terms. But, conversely, 87 per cent said they were seeing suppliers demand earlier payment of invoices.
The KPMG survey found that only 14 per cent of respondents said their cash flow forecasts were on target during the past 12 months, while only 5 per cent said they didn’t attempt any form of cash forecasting at all.
The survey also found that more than 40 per cent of respondents said the credit crunch had an adverse or extremely adverse impact on their access to credit and on the cost of credit.
KPMG says: “The best performing businesses tend to be those who link working capital performance to managerial incentives, and the survey found that almost a quarter of respondents hadn’t established a relationship between working capital and pay. Companies that provided incentives fared better over the last three years and expect to suffer less over the next three years, with more than 70 percent saying that they were slightly or very important to the success of a capital improvement initiative.”
And its advice: “A key message for many businesses is to instil a culture of executive sponsorship and effective communication of the importance of working capital across the business: 60 percent of respondents described this as very important.”
So what does it all mean? Well, it is bad news for Peter. If you are the Peter in the business equation, then watch out.
© Investment & Business News 2013