Erm…. the cheque “is in the post”

The Economist reports that a recent survey of large public companies in America shows that “days’ sales outstanding” (DSO)—or the number of days it takes companies to collect money owed to them, often by other firms—hit an average of 41 in 2007, up from 39.7 in 2006. That might not seem a big increase, but the indicator has rarely risen or fallen by more than half a day a year. When America went into recession in 2001, DSO averaged 38.9.

As sales stagnate, firms will delay paying suppliers for as long as they can. Added to this is the current chaos in the banking system. With businesses finding it hard to borrow, firms are trying to hoard cash. Problems spread out from there. It’s hard to be tough on customers that businesses are anxious to hold on to. But if they are too soft, companies risk creating serious cash flow problems for themselves. UK firms are acting tough with the number of county-court cases involving companies chasing overdue debts rising sharply in the past year or so.

The late payment of debt is a headache that can readily spread from one firm to another, illustrating how even healthy firms are not immune from difficulties elsewhere in the economy.