Working Capital Requirements Likely to Rise

April 17th, 2013 by Jim Cotterman

The Wall Street Journal had an interesting and sobering article today about companies stretching payments to suppliers.  What caught my interest is the discipline and aggressiveness of these policies in a post recession environment.  Such tactics increase working capital requirements for suppliers.  Working capital is the amount of money a business needs to pay its bills while it waits to be paid for its goods and services. While this article focused on the portion of working capital attributable to the gap between invoicing and payment, there is also an equally important portion attributable to the gap from produced/worked to invoice.

Combined, the work to invoice and invoice to payment cycles can represent three to eight months of cash flow for a law firm.  The median length of time is four months.  Some specialty firms can be much longer.  Law firm have over the past several years increased capital requirements and reduced their dependence on debt for financing.  This latest move by clients could add to capital needs even more.

The article also mentions how the companies are approaching this problem by bringing banks into the mix.  Essentially the bank buys the suppliers invoices at a discount and collects from the manufacturer.  There is a great graphic depicting this approach in the article.  While this may work well now, in measured amounts and with historically low interest rates; how it plays out when rates increase and the investment in these receivables grows is yet unknown.

This entry was posted on Wednesday, April 17th, 2013 at 6:54 am and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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