Writing in The Washington Monthly, Jeffrey Leonard — chief executive of an investment firm — offers a new theory for why small businesses are struggling. Big businesses, Mr. Leonard says, aren’t paying their bills on time to their small-business vendors.
Mr. Leonard urges President Obama to use his bully pulpit to focus attention on the trend and to issue an executive order require any company with a federal contract to pay all its bills within 30 days.
The article names names, too. Cisco Systems, Mr. Leonard writes:
… has seen its net earnings increase by 26.6 percent, from $6.1 to $7.8 billion in the last year. Yet effective March 31, 2010, Cisco announced to its small business suppliers that as a rule Cisco would wait sixty days after receipt of an invoice — or net 60, in business jargon — before cutting a check. The reason Cisco gave for this new policy was not that it was hard up: the company has nearly $39 billion of cash on its balance sheet, and in the third quarter of 2010 alone it spent $2.7 billion to repurchase its own shares. Rather, the corporation explained that it had been “benchmarking against our technology peers” and found a precedent for “new payment terms.” In other words: Everyone is doing it, so we are too.
AB InBev, the Belgian company that bought Anheuser-Busch, and Boston University are also doing it, according to Mr. Leonard.
The full article is on The Washington Monthly’s Web site. More excerpts follow:
In previous recessions, small businesses across America came back to life first, leading the economy forward with new job creation. That has not been the case in 2010. Even as large corporations are starting to hire again, small firms are still shedding jobs….
As is well understood, one major reason is that banks have scaled back small business lending…. But for millions of small businesses that supply billions of dollars of goods and services to America’s largest corporations — business-to-business or B2B sales, as they are known — another insidious trend over the past two years has cropped up that further undermines small business’s ability to invest in new job creation.
The trend has to do with cash flow. In bad times, all companies, big and small, seek to husband their cash by collecting their accounts receivable as fast as possible and honoring their accounts payable as slowly as possible. What is different in this downturn is that, thanks to structural changes in industry supply chains, large firms now have vastly more clout to engage in such behavior than small ones do. In fact, many large companies today have simply announced that as a matter of policy they will be paying their bills late — sometimes as much as four months late. This in effect forces small businesses, which really are hurting, to make free loans to big businesses instead of being able to use their working capital….