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06/09/2021

Will Extended Payments to Suppliers Last Beyond the Pandemic?

When the COVID-19 pandemic swept the U.S., retailers were hit hard and forced to temporarily close their doors.
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Many worked with their landlords and suppliers for extended payments to keep businesses on their feet. Now, more than a year later, some retailers are still pushing for extended payment terms to remain in place, wanting to hold on to the extra cash, The Wall Street Journal reported.

Since the start of the pandemic, chief financial officers have put a focus on cash, with companies aiming to boost their cash balances in 2021. That’s led to companies wanting to keep the flexible timelines with suppliers. Retail, in particular, faced some of the biggest cash-flow challenges of the pandemic. 

In the first quarters of fiscal 2021, the average number of days it took big U.S. companies to pay suppliers rose to 58 days, up 5.5% from the average of 55 days seen in the same period last year, Hackett Group data found. For fiscal year 2020, the average days to payment reached 62, up 7.6% from the previous year.

“Term extensions have not gone away,” Craig Bailey, an associate principal at Hackett Group, told the WSJ.

Macy’s is one major retailer benefiting from extended payment terms with suppliers, with an average of 163 days to settle up with its bills during the first quarter of 2021, according to CFO Adrian Mitchell, who discussed the topic during the Macy’s quarterly earnings call in May. That’s up from an average of 134 days last year, while the company reported $1.8 billion in its cash balance.

Retailers in other sectors, such as Oreo cookie-maker Mondelez Intl., are also benefiting from extended payment terms with higher cash balances. Mondelez reported an average of 130 days to pay suppliers at the start of 2021, compared to 122 in the same period last year.

While retailers may enjoy the looser terms--and see the benefits reflected on their balance sheets--the reality for suppliers may be starkly different. Retailers need to “walk a fine line” between negotiating payment terms and straining suppliers, WSJ reported. 

Some retailers may also be using supply chain financing, though they are required to disclose this payment arrangement. It works by companies partnering with a bank, which pays the supplier at a discounted rate. The company then pays back the bank at a later date than they would pay the supplier. The arrangement gained popularity during the COVID-19 pandemic, and could still be around today.