An operating partner should keep longer supplier payment terms out of a mid-size portfolio company's working capital targets and set those targets on the days the company takes to collect from customers and to sell its inventory.
PwC, whose working capital team sells terms benchmarking, data analytics and cash improvement work, analysed more than 17,000 listed companies worldwide from 2015 to 2024 for its Working Capital Study 25/26, on an undated page. Net working capital days, its gauge of the capital needed to run the business day to day, deteriorated by 13.5% for small businesses, and 19.8% for mid-size firms, since 2015, while large companies have kept their numbers in check by leaning heavily on suppliers and pushing DPO higher to hoard cash. In North America net working capital days have fallen 8.1 percent since 2015 while days payable outstanding, the days a company takes to pay its suppliers, were pushed out by more than 14 percent; PwC writes that the rise in DPO is masking the impact of worsening receivables and bloated inventory. The page gives no revenue or asset range for its size groups, and a privately held portfolio company is outside a study of listed ones.
PwC calls stretching supplier terms a short-term fix that is not sustainable and carries long-term risks, straining supplier relationships. That is PwC's judgement. The same page says companies will need to tighten up receivables and inventory performance, and names the ability to flag overdue accounts early and predict payment risk with greater accuracy as a benefit of advanced analytics in collections, giving no measure. A study in the Review of Financial Studies, published online on 1 August 2014, measured the supplier side: it matched 1,063 unique buyer-seller pairs, with 40 big retail buyers and 723 sellers that supply them, from public company data for 1985 to 2009 in its posted draft, and found that slower payment terms by large retailers are associated with lower investment at the supplier level, most sharply when bank credit was tight and for suppliers the authors class as financially constrained. Its buyers were all large investment-grade retailers and its suppliers much smaller, so it does not measure a mid-size buyer; its posted draft names no funder.
Nine-67's method starts from the balance sheet and income statement each company already closes monthly, which gives the same three day counts at every company in a portfolio. In month one the controller splits the last twelve months' change in working capital into receivable, inventory and payable days and sends it to the CFO and the operating partner. In month two the credit manager ranks open invoices by their chance of paying late with a model trained on two years of the company's own paid invoices, and works the calls from the top of that list, while the head of supply chain lists the items carrying the most days of stock. By month three the CFO and the operating partner rewrite the value creation plan's working capital targets in receivable and inventory days, and count no cash from payable days rising above their last twelve months' level.
The credit manager keeps a random fifth of customers on the old calling order. If customers called in the model's order take no fewer days to pay than that group, the CFO stops paying for the model and collectors go back to the old order.
The same study reports that as payable days grow, so does the markup enjoyed by suppliers, with markup defined as annual sales less cost of goods sold, as a fraction of cost of goods sold.
