While having aging payables may seem like somewhat of a positive as it indicates the ability to conserve cash, payables that are aged beyond 30 days can cause concern for a business buyer. The reasons for this include:
It may be an indication of a cash-flow issue that is preventing the business from paying its bills in a timely manner;
Accounting and bookkeeping processes may be inefficient or loosely managed;
This may be a clue that there is a problem with the vendor or its quality that is causing the business to delay payment until the issues, billing disputes, claims, or warranty items are resolved;
The company may end up with (or may currently be getting) worse pricing from vendors because of a slow payment history;
The company might be at risk of a vendor only providing products or services C.O.D.; or
The business might be at risk of losing a supplier because of slow payment, and if so, will there be viable alternate vendors with equal or better pricing, terms, and quality?
In preparing for a business sale, a buyer will perceive less risk if your company’s aging payables are the greater of 30 days or the maximum stated terms that creditors provide. If this is problematic it may indicate that accounts receivables management needs to be improved to increase cash available for payables, a line of credit is needed or should be increased, or the company’s payables management system needs to be improved.
Comments