Efficiently managing a company’s working capital can significantly improve profitability and cash flow. With the current economic state of uncertainty companies are facing today due to the COVID-19 pandemic, any action that can be taken to benefit these two targets is worth considering.
A key metric that measures how efficiently a company manages its working capital is the cash conversion cycle. The cash conversion cycle measures how long it takes from the time cash is paid to vendors, to the time when cash is collected from customers.
Cash Conversion Cycle =
Days Inventory + Days Receivable – Days Payable
The shorter the cash conversion cycle the greater the company’s liquidity. As such, efficiently managing working capital by reducing a company’s cash conversion cycle is a simple yet effective strategy to benefit their overall financial position. Extending payment terms with vendors is one factor to consider to shorten the cash conversion cycle. Other factors to consider are reducing inventory and shortening collection times from customers.
According to a recent Star Tribune article, “companies big and small are very eager to conserve their cash. And one of the easiest ways to do that is to extend their payment terms.” Companies such as 3M, Best Buy and Honeywell have all requested that their suppliers extend their terms to at least 90 days versus 30. Despite overall financial setbacks as a result of the pandemic, these companies are all counting on the additional 60 days to pay their invoices to provide a “temporary and positive impact”  on their efforts to improve cash flow.
It’s important to note that requesting or demanding extended payment terms with vendors can put a strain on a the relationship and cause some product vendors to “scurry to banks to rework loan repayment terms…[or] rely on credit cards or factoring companies to carry them through until their product invoices get paid.” 
Therefore, it’s important to consider which vendors the company would benefit from the most by extending payment terms and those that could also bear the burden in order to maintain a positive relationship.
Whether companies have made the strategic decision to focus on working capital management pre-pandemic or are doing so as a response to the pandemic, this topic has quickly become a key priority for CFO’s across the globe to manage cash flow and adapt.
 Anthony Souffle, “3M Suppliers Told They Will have to Wait Longer for Payment,” Star Tribune, May 15, 2020.
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