Procter & Gamble Co. PG -0.19% is planning to add weeks to the amount of time it takes to pay its suppliers, a shift that could free up as much as $2 billion in cash for the consumer products giant, people familiar with the matter said.
P&G could use that cash to fund investments in new factories overseas or to help pay for stock buybacks. That added flexibility, however, will come at the expense of the companies that supply P&G with materials or services. The suppliers will have to tie up more of their own cash in receivables or eat the interest costs charged by banks to bridge the gap until P&G pays its bills.
The move highlights how America's biggest companies continue to build on the aggressive cash management practices they adopted in the wake of the credit crisis. What began as a way to preserve cash when markets dried up a few years ago has become a means of freeing up money to fund expansions, buy back stock and support dividend payouts at a time of lackluster sales growth and shrinking profit margins.
P&G is actually late to this game. It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts. The company is looking to move its payment terms to 75 days and recently started negotiations with suppliers, people familiar with the matter said.
To help suppliers deal with the changes, P&G is working with banks that will offer to advance cash to suppliers after 15 days for a fee, some of the people said. The changes are expected to be phased in over three years and ultimately could affect hundreds of companies, the people said.
Across industries, corporations like DuPont Co. DD -1.43% and J.C. Penney Co. JCP -1.84% are trying to reduce the amount of cash tied up in day-to-day operations by taking more time to pay suppliers, collecting faster from customers or reducing manufacturing and inventory costs .
The moves are creating ripple effects. Companies that hold on to cash longer create deficits at suppliers that have to find financing, raise prices or squeeze other firms along the supply chain. Smaller companies with little bargaining power and less access to credit ultimately could see their costs rise, pinching funds that could otherwise be spent on hiring or investments.
Customers of Eastek International—a contract manufacturer of electrocardiograms, patient monitors, magnetic door locks and industrial products—have grown more aggressive about extending payment terms, Chief Executive Joe Rocco said. Eastek now gets paid in an average of 50 days, versus 30 days around six years ago.
"It becomes a cost of doing business for us," said Mr. Rocco, whose company has about 950 employees and operations in Illinois, the Netherlands, Hong Kong and China. The increased working capital demands have made the company more cautious about hiring and investing in new equipment, he said.
On the other side of the working capital equation, DuPont has freed up over $2.6 billion in cash from its day-to-day operations over the past four years and is looking to do more. "You don't want to have excess cash tied up in the company that's not generating any value," said Nick Fanandakis, chief financial officer of the manufacturing and science company.
P&G rivals Kimberly-Clark Corp., KMB -0.31% Church & Dwight Co., CHD -2.04% Energizer Holdings Inc., ENR -0.94% and Newell Rubbermaid Inc. NWL -1.09% have said they are working on stretching out payment terms with some suppliers and making manufacturing processes leaner to reduce inventory costs. Energizer is targeting roughly $200 million in savings from working capital, while Newell is working toward $100 million. The companies declined to disclose how long they take to pay their bills.
"Companies are looking at doing more self funding, because borrowing is not going to be cheap forever," said John Ahearn, global head of trade at Citigroup Inc. C -2.19% He says firms are also trying to position themselves for growth when the economy picks up. "Once you make these improvements, they are here to stay," Mr. Ahearn said.
P&G has a lot of demands on its cash. The company, which has raised its shareholder dividend for 57 consecutive years, is in the midst of a large-scale restructuring aimed at reducing expenses by $10 billion by 2016. Shortly after embarking on the cost-cutting plan last year, P&G said it would suspend share buybacks to conserve cash amid an uncertain outlook and to maintain its high credit rating. After coming under pressure from investors, however, it resumed and ramped up the repurchases, in part by using borrowed funds.
Company executives have said they expect to be able to fund increased capital expenditures as well as expansion in emerging markets while continuing to return the bulk of profits to shareholders via dividends and buybacks. The cost cuts and cash freed up by taking longer to pay suppliers will give P&G more flexibility to manage its finances.
P&G currently spends more than $50 billion a year buying everything from plastics and cardboard to fragrances and chemicals from an army of about 75,000 suppliers and agencies. They include companies like MonoSol LLC, which makes water soluble films for P&G's Tide Pods laundry packets; SGS International Inc., which makes printing plates used for packaging for Swiffer wet mops, Gain detergent and other P&G products; and Albany International Corp., AIN -1.88% which produces fabrics and materials used to make Charmin toilet paper and Bounty paper towels.
The companies wouldn't comment on the terms of their agreements with P&G, which isn't their only customer.
The risk in pushing out payment terms is that it puts financial strain on companies that supply key inputs and are themselves big employers. Unhappy suppliers could try to respond by taking their business to rivals, reducing the cost of producing their products or raising their prices, increasing costs for buyers.
Federal-Mogul Corp., FDML -0.74% which supplies replacement brake pads, windshield wipers and other spare parts to wholesale and retail distributors, saw a large cash outflow last year after agreeing to extend payment terms on $285 million in receivables from several large retail customers. Executives told analysts on a conference call in February that they don't intend to continue extending payment terms in the future.
"If we need to lose market share because of our terms, I'm willing to concede business if we cannot continue to operate on the margins or the terms that are reasonable for our organization," Mike Broderick, Federal-Mogul's chief executive, said on the call.
Many large companies "have come to understand what can happen to their supplier base when there is disruption" and are looking at how they can help mitigate the impact on suppliers, said Michael McDonough, global head of supply chain at J.P. Morgan Chase JPM -1.41% & Co.
Increasingly, companies including Wal-Mart Stores Inc., WMT +0.05% Unilever ULVR.LN +0.50% PLC and Kohl's Corp. KSS -1.23% are working with banks to offer their suppliers cheap financing when payment terms are extended. Such financing, which is optional, can enable suppliers to get paid quickly—often within days of submitting their invoices.
The banks in essence take over the invoices, advance payments to suppliers and collect from buyers when the bills come due. Some suppliers can choose to get paid in as few as five to 10 days, even though their customers are taking as long as 90 days to pay.
Low interest rates make the service more affordable. Banks now charge annual rates as low as 1.3% to buy receivables with creditworthy customers like P&G.
P&G is planning to do the same, according to people familiar with the matter. Suppliers that take up the financing offer would get cash advances in 15 days that build in a low interest rate based on P&G's high investment-grade credit rating, the people said.
P&G is pitching this to suppliers as a "win-win" proposition for both sides, they said. The arrangement would benefit suppliers in the U.S. and other countries whose borrowing costs are higher than P&G's.
