Lowe’s Continues Supplier Payment Balancing Act

When home improvement chain Lowe’s needed to get a tighter grip on its finances, the corporation turned to its supply chain, launching new efforts to take advantage of early payment discounts with suppliers and other cost-saving tactics.

According to reports in The Wall Street Journal published Wednesday (Aug. 19), the strategy appears to be working. Analyst Peter Benedict, who works for Robert Baird, said in a discussion of Lowe’s quarterly earnings report that the corporation’s accounts payable are more closely aligned with inventory levels.

According to Lowe’s Finance Chief Robert Hull, the company’s merchant team “has been working really hard to evaluate the days of inventory relative to days payable and tried to get better coverage there.” Benedict told reporters that the strategy allows Lowe’s to broaden its cash cycle without squeezing suppliers.

Overall, reports said Lowe’s balance sheet has become more efficient as it strikes deals with suppliers to access early payment discounts. Regarding Q2 2015, Hull said that there is a slightly higher level of inventory relative to AP due simply to the timing of orders with invoices not settled within that period.

It’s a balancing act, however, that has seen Lowe’s extend payment terms with suppliers by an average of two and a half days, according to Hull.

“By taking longer to pay, it is a direct increase in operating and free cash flow,” said Georgia Institute of Technology accounting professor Charles Mulford, according to WSJ. “As long as you can do it, there’s not a downside.” He added, however, that this tactic will only remain sustainable as long as suppliers are willing to accept longer payment terms.

But Mulford said that a corporation of Lowe’s size has “real power over the suppliers,” and therefore it is likely that the company will be able to sustain this strategy.

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