Will changes in service standards reduce cash on hand for businesses?

Alan Robinson has an interesting story about a Chief Financial Officer who’s blaming the US Postal Service for some negative numbers on his company’s financial report:

Last week, Fastenal became the first public corporation to report that changes in service standards for single-piece First Class mail have had a negative impact on its finances. In reviewing the 2nd quarter’s results, Fastenal’s CFO Daniel Florness explained that the most significant reason for the increase in the corporation’s accounts receivable was changes in how Fastenal receives payment from its mostly small business customers.

What Fastenal’s CFO said was that the company’s accounts receivable were higher at the end of the second quarter because mail is coming in more slowly, and mail that might previously have been delivered on, say, Friday, was not getting delivered until Monday. Because the books closed on the weekend, the company didn’t get to cash those Monday and Tuesday checks and count them as cash on hand in Q2.

But wait a second- Fastenal didn’t actually lose that money- it just arrived a day or two “late”, assuming the CFO’s rather vague account is accurate.

So the CFO’s claim that his receivables are up because of slower mail delivery in the 2nd quarter might be true. But if it is, it’s a one time hit to the company’s cash on hand. After all- the money that he didn’t get to count in June gets added to his July cash on hand (and decreases his July receivables).

Think about it this way- from a business’s point of view, a relaxation in mail service standards by x days is the same as your employer deciding to delay your paycheck by x days. If you currently get paid on Friday, and your employer decides to change your payday to the following Monday, it could be a real headache for you. But in reality, it would be a one time loss for you, and a one time gain for your employer. Once you get past that first payless Friday, your weekly income, and your employer’s weekly payroll expense, will be exactly the same as they were before. (If, like most postal workers, you’re paid biweekly, you went almost three weeks without a paycheck at the beginning of your career- how much of an impact does that have on your finances today?)

Alan suggests that Fastenal’s problem will be ongoing:

With customer payments arriving slower but outlays continued to be paid on the same schedule, Fastenal will see either a reduction in the amount of interest Fastenal earns on cash on hand or an increase in the interest paid to for short-term borrowing to cover immediate expenses.

But that’s illogical: it implies that the rest of the business world will chug right along while poor Fastenal loses out every week thanks to the USPS. But if Fastenal’s mail is slow in arriving, won’t the same be true for everyone else? Won’t Fastenal’s payments to its own creditors arrive a day or two later too, resulting in the company’s cash on hand increasing?

I don’t think the Fastenal CFO was trying to mislead anyone- as I’ve said, he may be correct about the change in his company’s incoming daily remittance profile. But I’m sure that if he’d had a chance to reflect a bit more, he might have made it clear that he was talking about a one time financial event, not a trend.

Read more: Fastenal Corporation Suspects that USPS Operating Changes Hurt Its Finances | Courier Express and Postal Observer.

  • Alan Robinson

    The change in accounts receivable is a one-time issue relating to quarters that end on a day of the week that previously would have received mail with payments. The cash will show up in the next quarter and could result in lower Accounts Receivable then. It is noise that Fastenal has to explain whenever the calendar creates the unique situation that occured in the 2nd quarter.

    What is more serious is the fact that cash is arriving slower than before and that is not related to earnings reporting. It affects cash management policy. Cash that was in the bank earning interest is now still sitting in a processing facility. The impact is equivalent to customers deciding to take 11 days to pay a bill instead of 10. The difference is with customers, Fastenal can press them to pay more promptly. it can’t press the USPS to process the mail faster.

    • postalnews

      But it only impacts them once. After the first time Fastenal’s mail is delayed, their weekly revenue is exactly the same as it was before. The “loss” this month is offset by an equal “plus” the following month. You’re also forgetting that the exact same issue regarding what day of the week you close the books on would have happened in the past, prior to the alleged “slowdown”. If the books close on Tuesday, you don’t get to count the checks that arrive on Wednesday, etc., etc.

      And, as I point out, the change affects Fastenal as a customer in exactly the same manner.