Companies strengthen collections, aim to get cash in the door as threat of recession looms

Finance chiefs over the past year have increased their focus on working capital as the Federal Reserve has increased interest rates. Chief financial officers are working to wring more cash out of their operations, rely less on financing and boost deposits in higher-yielding bank accounts. They are turning their attention, in particular, to their accounts receivable, looking to increase the likelihood that they’ll collect the money their customers owe in the event that the economy falls into a recession in 2023.

As a result, companies are pushing customers to pay their bills earlier, offering discounts to those that pay ahead of schedule or negotiating shorter billing cycles, advisers said. Other companies—particularly in the business software sector—are extending due dates for cash-strapped customers and looking back to prior recessions for early warning signs of customer distress, according to advisers and executives.

Among the 445 companies in the S&P 500 that had reported third-quarter results as of Dec. 20, the average number of days of sales outstanding, or DSO—a metric that estimates how long it takes a company to collect on its bills—stood at 55.9 days, roughly on par with a year earlier, according to S&P Global Market Intelligence, a financial data company. That’s down from the first year of the pandemic in 2020, when it took those same companies an average of 59.5 days to collect on their bills, up from 55.8 days in 2019, according to S&P.

At cloud-services company Akamai Technologies Inc., the finance team recently began analyzing collections data from the 2008 global financial crisis looking for lessons they could apply ahead of the next recession, said Chief Financial Officer Ed McGowan. The analysis prompted Akamai to reach out proactively to companies before they’re late on their bills to understand potential financial pressures they’re facing.

Akamai’s sales team called small businesses, which typically feel the early effects of a downturn, as well as companies in Europe, which are grappling with high energy prices. “You do have a lot more risk heading into a recession, so you want to identify if customers are having collection problems early," Mr. McGowan said.

So far, however, Akamai hasn’t seen an uptick in late payments or bad debts, Mr. McGowan said. The company’s days of sales outstanding during the latest quarter declined to 67.3 days from 70.4 days during the prior period, according to S&P. That translates into roughly $45 million in additional cash on hand, the company said.

Akamai customers in sectors such as travel and hospitality that received longer payment terms early during the pandemic have returned to paying on the company’s standard 30-day billing schedule, Mr. McGowan said. Akamai has also worked on its accounts receivable processes, including ensuring billing details are entered correctly and sending out its highest-dollar invoices before others.

Finance chiefs and treasurers in recent months have applied more scrutiny of their company’s credit policies, looking at how their payment terms compare to competitors’ and taking steps to reduce their terms, said István Bodó, a director at consulting firm Hackett Group Inc. That can happen through negotiations with customers or by providing incentives such as payment discounts, he said.

In an inflationary environment, the longer a company waits to collect on an invoice, the more expensive it gets, Mr. Bodó said. “The purchasing power of that particular amount decreases over time," he said, referring to cash collections.

Early in the pandemic, some companies extended payment terms to customers that needed funds to shore up liquidity to help navigate temporary lockdown measures. Companies now face a different set of economic pressures, including high inflation and inventory levels following supply-chain disruptions over the past two years.

Some business-software customers are asking for more leeway on their bills, according to finance chiefs in the sector. “We are seeing an increase in those types of requests, not to do with our services or anything of that nature, just more to do with the [macroeconomy]," said Patrick Brickley, CFO of Everbridge Inc., referring to customer requests for extended payment terms during a Nov. 8 earnings call.

The Burlington, Mass.-based software firm saw its average days of sales outstanding during the quarter ended Sept. 30 go up to 84.5 days from 80.5 days during the prior-year period, according to S&P. “That’s part of what we have our eye on as we think about 2023," Mr. Brickley said. Everbridge said it aims to provide customers with payment terms that are mutually beneficial.

“What most of my clients are doing is trying not to have it be a full-blown problem—so, accepting a payment schedule, even a really, really long payment schedule," said Gina Gutzeit, senior managing director at advisory firm FTI Consulting Inc.

ServiceNow Inc., which sells software that helps companies track their work, recently began offering certain customers flexibility to make payments later than their scheduled due dates, CFO Gina ​​Mastantuono said during a Dec. 8 investor conference. Santa Clara, Calif.-based ServiceNow provided similar types of support to customers in 2020, which helped to strengthen customer relationships, she said.

The difference today is that companies face different pressures on their balance sheet, including high inventory levels, Ms. Mastantuono said. “I just want to be mindful of that and work with them on that, especially if it’s short-term," she saidat the conference. The company declined to make Ms. Mastantuono available for an interview.

ServiceNow’s days of sales outstanding during the third quarter fell to 44 days from 47.4 days a year earlier, according to S&P.

This story has been published from a wire agency feed without modifications to the text