When trading on open account, to win a client, companies might be willing to provide extra days for them to pay. Suppliers often play the invisible bank. The problem is that the longer you request to pay your supplier, the more your own working capital is constrained and you may end up not paying at all.
A rise in Days Sales Outstanding or (DSO) can mean the vicious cycle of non-payment (delay, past-due, non-payment and sometimes insolvency) was set in motion. Good enough reason to focus our latest analytic report on cross-country and -sector analysis of payment delays by 26,000 listed companies worldwide.
DSO is a valuable indicator, as it measures how long companies must wait before they collect payments. There are several factors which can influence DSO: the economic cycle, legislation and payment practices and how strategic is a supplier to stay afloat.
So what can you learn from the brand new update of DSO by the Euler Hermes Economic Research? The team analyzed trends in 36 countries and across 21 sectors in the light of new balance sheets available. The results are summarized in our latest report: “Worldwide DSO: Paying the penalty for low growth”.
Euler Hermes forecasts global Days Sales Outstanding (DSO) to remain stable around 64 days in 2016. However, industries and economies that are already in a sensitive position, due to external shocks or wrong policy choices, are prone to pay a price. Remember: 1 out of 4 companies still pay after 90 days on average.
For instance, companies operating in the Electronics, Machinery & equipment sectors wait the longest period to get paid: 89, 87 and 81 days in 2015. One the contrary, sectors closer to the consumer – such as Retail, Food, Non-business services, and Transportation – tend to over perform with a DSO below 50 days, on average.
When looking at results by countries, DSO is on the rise again in China where it is forecast to reach 92 days in 2016, the highest level worldwide. Conversely companies speed up payment terms in Western Europe where DSO stands on average at 60 in 2015. It is expected to decrease slightly to 59 in 2016.
In the U.S., the average DSO remains stable around 50 days, but industries considered low risk – Pharmaceuticals and Chemicals – relaxed their payment policies causing an increase by +4 days. Conversely, DSO decreased by -4 days in industries going through economic hard times – Metals and Energy – to 57 and 50 days respectively.
Very interestingly there is sort of a U-shaped relationship between DSO and the economy. In normal times, the weaker the economic climate, the higher the DSO. Yet, DSO can also be shortened massively in very challenging times of defiance. This often results in a cash crunch for wholesalers and importers, a situation which is visible in countries like Russia, Brazil or Turkey today.
DSO certainly plays an important role as a leading indicator of the overall confidence prevailing in the business community.