UK companies are relying on extended payment terms to finance growth and investment to fuel the economic recovery, according to new research from Euler Hermes, the world’s leading credit insurer.
The company has analysed the gap between delivering goods and being paid for them, called Days Sales Outstanding (DSO). DSO is a widely recognised leading indicator of the health of firms and potential financial stress on businesses further down the supply chain.
DSO has stretched to an average of 56 days in the UK in 2015, up from 52 days in 2011 due to the country’s rapid recovery and as a consequence firms have had to rely on longer credit terms to finance expansion, according to Euler Hermes.
“Payment Behaviour – Who’s Paying The Piper” anticipates that the global average DSO in 2015 will remain unchanged at 66 days for the fourth consecutive year but finds there are marked differences between advanced and emerging markets, and across individual sectors and companies.
Ludovic Subran, Chief Economist, Euler Hermes, said: “The data suggests UK companies are continuing to rely on extended credit terms, which places additional pressure on the rest of the supply chain. In the absence of working capital from other sources, companies need to take extra care to look for signs of financial stress amongst their customers.”
The UK increase has taken place in almost every sector and the trend is particularly marked in industrial goods, where payment dates have increased by +11 days to 61 days DSO in the last five years. However, the country’s overall DSO trend should stabilise as economic growth moderates in 2015 and, at 56 days, is well below the average for advanced economies of 65 days.
DSO in emerging markets will increase to an average 69 days in 2015. Russia, China and Brazil lead this increase in past-dues. In China, typical DSO increased massively (+22 days between 2007 and 2015). Three main drivers explain this change in the payments behaviour of Chinese firms:
- Chinese companies have been chasing international clients and offering them supplier credit to win new business;
- Chinese firms are suffering from the country’s economic slowdown and passing on payment pressures to their own suppliers and clients;
- Intercompany credit has become one of the main alternative sources of finance as access to bank credit and shadow banking has been reduced in the past year.
By contrast, the average DSO in advanced economies is expected to decline slightly to 64 days in 2015, down from 65 days in 2014, as economic recovery means that companies in these markets are once again generating more cash, enabling bills to be paid faster.
With the exception of oil and gas, every sector has been suffering from the rapid DSO increase in emerging markets. This evolution is most striking in technology, industrial goods and automotive, key sectors for these markets. The first two sectors are also showing the highest level of DSO at 91 and 75 days respectively.
“The oil and gas exception can be explained by excessive cash accumulation within major firms. This excess liquidity enables oil and gas firms in advanced economies to be more flexible about the payment timing of their clients. This situation is not likely to last in the long run as declining oil prices and the need for new investments raise liquidity constraints,” adds Marc Livinec, a Sector Economist with Euler Hermes and one of the authors of the report.
The Euler Hermes research also finds that Italian companies continue to be paid very slowly, with an average 99 days DSO, 33 days above the global average, which stretches to 148 days in the chemicals sector and to 149 days in the technology sector. By contrast Chinese and Indian companies are paid in an average 74 and 77 days, respectively, while Dutch companies are paid the quickest with an average 47 days DSO.
B2B activities continue to experience longer DSO on average than B2C businesses as companies which are directly in contact with the final client are paid much faster than the ones involved in intercompany credit.