Cash Management Article Review October 2, 2012

Section 1: Original Work Statement
I, xxxxxxxx, verify that this article review is solely my own work and creation and it has been prepared solely for credit in this class.

Section 2: Article Citation
Serena, N. and Tuna, C. (August 31, 2009). Big Firms are Quick to Collect, Slow to
Pay. Wall Street Journal (page 1).

Section 3: Main Issue of Article
This article was very important and was exposed to many readers because it made the front page of the Wall Street Journal in 2009. The authors wanted to inform their readers of a cash management development that a number of credit professionals had recognized a long time ago but wanted to expose the issue to more financial professionals and the multitudes that read the Wall Street Journal. Big companies have sped up efforts in collecting money and at the same time have slowed down their payments to suppliers, vendors and money owed back to customers. Big firms are quick to collect and they are slow to pay (Serena). This concept must be understood as these big companies are fine tuning and sneakily finding ways to squeeze as much cash flow as possible out of operations and small businesses in which they use.
An important statistic that came out of the article exposes the fact that companies with annual revenue in excess of more than $5 billion are collecting bills on the average of 41 days in 2009 down from 42 days in 2008. The same companies are taking 56 days to pay suppliers and creditors in 2009 which is up from 53 days in 2008 (Serena). This seems small, but it represents a 5% increase. For companies that are moving lots of money, this small percent means a big deal to them. On the other side, the companies making less than $500 million per year collected cash more slowly and paying bills more quickly during these time periods. Payables to vendors were averaging 40 days, which is 6.5% smaller compared to 43 days in 2008. In the effort to collect payments, there was an increase from 54 to 59% between 2008 and 2009 which is nearly 8% (Serena).
This pressure that is being exerted by the bigger companies could be temporary and cause a backfire if they start putting vendors out of business. As explained in the article, Sung Won Sohn, a former chief economist at Wells Fargo, says “There’s a power struggle going on as the credit crunch has moved to Main Street. Big firms can force their terms on suppliers and customers. And if you’re a small business or a small store in a mall, you have no bargaining power and have to take what’s given, which is not much today” (Serena). When it takes small businesses to receive their payments on the accounts receivable, they must turn to bank loans and credit lines. This is difficult for these companies, especially in times of the credit crunch. It is critical to evaluate terms on both ends as the customer terms and supplier terms should be balanced. When a business must “float”, it must go out and get working capital.

Section 4: Relationship to Course
In Chapter 6, Section II in the textbook, we learned about the “Working Capital Cash Conversion Cycle” (CCC). Throughout the beginning of the chapter, the author describes the numerous ways to decrease the number of days for the CCC by making changes to the days’ inventory, days’ receivables and the days’ payables. When these three time periods are altered, they will have different effects on the CCC. This strategic planning on the part of the larger firms to shorten this CCC makes sense when reading in the text that a quicker cash turnover can generate more money for a company. This cycle should be as short as possible, because the shorter the cycle, the better the financial performance of a company.
In Chapter 7, Section II in the text book, we learned about “Treasury Management Timelines” in which treasury professionals work on a company’s operating cycle to make sure it is financed in the most cost effective manner. It also talks about “Operating Cash Flows” and how funds are disbursed to vendors and suppliers. The cash flow timeline and float are mentioned throughout this chapter and the delay between starting and completing the specific phase or process of the cash flow timeline. There are significant benefits to collecting quickly and disbursing slowly. The Wall Street Journal article mentioned the fact that Anheuser-Busch told suppliers it would take as many as 120 days in order to pay its bills, which went up from 30 days (Serena). This announcement and move by Anheuser-Busch is discussed in the textbook and would be considered in conflict with prudent business practice and the maintenance of good relations with stakeholders. There are definitely opposing incentives and Anheuser-Busch must believe that it will have its way.

Section 5: Personal Reflection and Comments This assignment was a good exercise in applying terminology and concepts to the real world. I personally do not think that this textbook does a very good job in providing enough real world examples to the concepts that it introduces. With this Article Review, I was able to shed light on things we learned from two different chapters and it feels good to know these cash management terms and the big picture of how finance works. It is very interesting and informative to know how companies are trying to make more money when examining their real world moves in the news. If reading the WSJ a few weeks ago, I would have skipped this article because I wouldn’t have known what most of these terms and concepts. Now that we have learned these concepts this semester and learned to apply them to real world articles it seems as if we have a foundation to grow with cash management.