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.
Now both June of 2012 and June of 2013 ended on a weekend. So the calendar is similar, so my comment about the calendar might sound a little odd. But what we’re — and I don’t know if this is a post office, logistics thing or what’s driving this, but we’re slowly seeing more and more of our cash come in, in the first 2 and 3 days of the week than what’s historically the norm. Historically, we had a big cash come in on Monday, which is really weekend processing of mail coming through the post office because the goods — most of our cash still comes in via the U.S. mail.
If I look at the stats today, about 50% of our cash comes in the first 2 days of the week. Another 20% comes in on Wednesday. So on the first 3 days of the week, about 70% of our cash comes in and that’s even different from what it was a year ago. So if we held our books open until Tuesday instead of closing on the weekend, our AR would look a lot better. But bottom line is calendar is impacting and just the way the mail comes in is impacting our days.
Cutting USPS operating costs Hits Fastenal Finances
The increase in accounts receivable at Fastenal has a couple of impacts on Fastenal finances.
- First, the publicly reported corporate balance sheet now includes a higher level of assets in the form of accounts receivable than would have occurred if the Postal Service had not changed service standards.
- Second, the shift in when payments arrive means that Fastenal has less cash on hand every Monday and to a lesser extent every Tuesday than it did during a similar period last year. Slower arriving cash payments, forces changes in cash management strategy as changing First Class mail service quality did not change the schedule when Fastenal has to pay vendors and employees.
- Third, the change in mail service will affect Fastenal’s revenue and/or costs. 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. While the amount is small, it is non-zero.
- Fourth, the immediate impact of the change in mail delivery will be a small reduction in Fastenal profits. Over time, this profit impact will diminish as Fastenal either adjusts prices or finds other ways to cut costs to mitigate the increased costs/lower revenue associated with slower mail delivery.
Why did Mail Arrival Change at Fastenal
Mr Florness’s comments suggest that he believes that the change in mail arrival had something to do with weekend processing of mail. This is not all that surprising given all the discussion regarding the proposed switch from six to five-day delivery. However, he is mistaken as changes in weekend mail processing and delivery still remains in discussion and has not been implement
The degradation in First Class mail service that Fastenal has seen has seen reflects changes in Postal Service operations over the past year. During this period the Postal Service changed its operating plan that added a day or two to the time between when one of Fastenal’s customers would drop its payment in the mailbox and Fastenal received the payment.
The increase in delivery time from the sender’s perspective reflects a combination of changes in cut-off times for single-piece First Class mail and changes in service commitments for significant volumes of mail destined to locations outside of the origin facility’s service area.
Elimination of 6-Day Delivery Will Cause More Problems for Fastenal
Currently 50 percent of the mail containing payments that Fastenal receives early in the week is likely processed on weekends either at origin or destination. Eliminating Saturday mail processing and delivery will increase the time of much of this early-week delivered mail by an additional day and could affect mail that arrives later in the week as well.
The slower arrival of payments that eliminating Saturday delivery will have will for Fastenal will have similar financial impacts that the change in service standards had. Fastenal will likely see increases in accounts receivable in some quarters and will see further reductions in interest earned on cash on-hand and/or increases in interest paid when borrowing is required.
Fastenal is Not Alone
Fastenal is just an example of large number of companies that are retailers or wholesalers to small and medium enterprises who will also see most of their payments arriving by mail. Other nationwide or multi-regionfirms serving the same small and medium enterprise market include industrial supply companies like W.W. Grainger and HD Supply, uniform and linen rental companies including Cintas, Angelica Corporation, Alsco and G&K Services, suppliers to building contractors like Rexel USA and Furguson Enterprises and local auto-parts suppliers like Autonation. These firms, like Fastenal all have larger Finance departments and will likely notice the impact of slower cash payments and increased accounts receivables that Fastenal saw. I would expect that some of the publicly traded firms will make comments about the impact of slower mail service just like Fastenal.
In addition, to these national and regional firms, there are hundreds of smaller firms that serve local or regional markets providing services and products similar to the companies noted above who will also be affected by slower mail delivery. The impact on these smaller firms will be different. It will likely take them longer to notice the changes in receivables that Fastenal noticed and they may not see the connection between slower mail delivery and increased receivables. Because it will take them longer to recognize the cause of the problem, they will also react slower and bear higher costs for each dollar of increased receivable than companies like Fastenal will.