Sageworks recently analyzed the changes to private industries’ accounts payable days (A/P Days, the number of days on average it takes a company to pay for materials and labor used in operations). The analysis showed that most private companies —14 of the 19 sectors analyzed—are recently taking longer to pay their suppliers. Their hesitancy with cash payments may, in part, come from uncertainty in their operating environment.
More granular analysis of A/P Days shows that over the past two years, 12 of the 20 industries that take the longest to pay their suppliers were in the manufacturing sector. And these industries, too, are guilty of increasing their A/P Days this year.
| Longest Payment Periods for Last Two Years | |
| Source: Sageworks, a financial information company, 7.13.2011 | |
| Industry | A/P Days |
| 4482 - Shoe Stores | 47.8 |
| 4483 - Jewelry, Luggage, & Leather Goods Stores | 44.4 |
| 3259 - Other Chemical Product & Preparation Manufacturing | 44.0 |
| 3252 - Resin, Synthetic Rubber, & Synthetic Fibers Manufacturing | 43.5 |
| 3341 - Computer & Peripheral Equipment Manufacturing | 43.1 |
| 3351 - Electric Lighting Equipment Manufacturing | 42.9 |
| 4236 - Electrical & Electronic Goods Wholesalers | 42.3 |
| 3262 - Rubber Product Manufacturing | 41.8 |
| 5171 - Wired Telecommunications Carriers | 41.1 |
| 3353 - Electrical Equipment Manufacturing | 40.9 |
| 3363 - Motor Vehicle Parts Manufacturing | 40.4 |
| 4237 - Hardware, & Plumbing & Heating Equipment & Supplies Wholesalers | 39.8 |
| 3334 - HVAC & Commercial Refrigeration Equipment Manufacturing | 39.7 |
| 3311 - Iron & Steel Mills & Ferroalloy Manufacturing | 39.6 |
| 4231 - Motor Vehicle & Motor Vehicle Parts & Supplies Wholesalers | 39.5 |
| 3273 - Cement & Concrete Product Manufacturing | 39.4 |
| 4234 - Professional & Commercial Equipment & Supplies Wholesalers | 39.4 |
| 3333 - Commercial & Service Industry Machinery Manufacturing | 38.9 |
| 3113 - Sugar & Confectionery Product Manufacturing | 38.5 |
| 4238 - Machinery, Equipment, & Supplies Wholesalers | 38.4 |
Why does the manufacturing sector have high accounts payable days relative to other industries? More so than retailers and service providers, manufacturing companies have foreign suppliers and must import raw materials from around the world. Cross-border transactions inherently take longer thanks to customs and tax considerations, and manufacturing companies are not inclined to rush payment or pay their suppliers until the goods have arrived and are ready to be used on the manufacturing floor. Consequently, their payment periods are longer than most. Interestingly, accounts receivable days for manufacturers is not high compared to other industries, so they do not necessarily have a long cash conversion cycle.
One solution to the inefficient payment process with manufacturers, specifically around their trade payables, is the creation of formalized trade payable financing programs, and these programs are starting to become more popular. In these programs, financial firms act as a paying agent and finance the goods for the short period of time after the goods leave the supplier's dock and before they arrive on the manufacturer's floor. These intermediaries pay the suppliers immediately and then receive payment from the manufacturers at a later date. This kind of relationship is profitable because the interceding financial firm has a much lower cost of capital than the manufacturers, and they can also adjust their fee based on the credit risk the manufacturer poses.
If this relationship with trade payable financing programs takes off—and if manufacturers or the financing firms are incented by cash discounts for earlier payment—then the manufacturing sector may gradually vacate the list of longest payment periods. Then everyone wins: suppliers are paid more quickly, manufacturers only pay for goods when they need them, and the financial firms that take on some risk during shipment make a little profit.
Sageworks, a financial information company, collects and analyzes data on the performance of privately-held companies and provides financial report analysis.
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