Payment Delays: Don’t Lower Your Guard

5 min
  • Good news on global growth comes with a significant deterioration in payment terms. Days Sales Outstanding (DSO) increased by +2 days in 2017 globally to 66 days on average, its highest level since 2007. It had previously been stable for five years, around 64 days. As global growth accelerated, companies extended their trust to their clients through longer payment delays. We expect DSO to rise by one more day to 67 days in 2018, due to the positive economic and financial outlook.
  • DSO increased in two out of three countries and two out three sectors in 2017. In particular, DSO increased where it was already high. One company out of four in 2017 was paid by its clients within 90 days. In emerging countries, it was one company out of three.
  • Overall, Electronics, Machinery and Construction record the highest DSO (all above 85 days). They are also the sectors where the number of companies with DSO exceeding 90 days is the highest: almost half of the companies in Electronics, two out of five companies in Capital goods and Construction. On the other end of the spectrum, Agrifood, Transportation and Leisure goods companies are paid a lot faster than the global average.
  • The US, part of the Eurozone and China experience the highest increase in DSO:
    • (i) DSO increased by +2 days in the US in 2017
    •  (ii) It increased by +2 days (to 66 days) in the euro zone, hiding significant increases (Spain, Portugal, Greece, the Netherlands) and sharp decreases (Italy, Denmark, Finland)
    • (iii) it increased by +3 days in China (v. +1 day on average in Asia), reaching a ten-year high at 92 days.

Chart 1  Change in (global figures of) DSO and GDP growth between 2007 and 2018

Sources: Bloomberg, Euler Hermes

The return of growth and trust distract attention from DSO

As shown in chart 1 below, there is a clear correlation between DSO and global economic activity as measured by GDP growth. The economic and financial crisis of 2007-2008 had led companies to closely monitor or accelerate debt collection, reflected in the sharp fall in DSO (-5 days, to 60 days in 2008 on average).

The return of growth then allowed DSO to rise to 64 days where it stayed constant from 2012 to 2016 before the backdrop of +2.8% p.a. average GDP growth.

We interpret the latest increase in DSO as a certain lowering of the guards and greater trust as a result of stronger growth and optimistic short-term macroeconomic forecasts: GDP growth reached +3.2% in 2017, after +2.6% in 2016. We expect a similar dynamic in 2018, with global DSO rising by one more day, to 67 days.

Widespread lengthening of payment periods

Across our sample of 25,000 listed companies across 20 sectors and 36 countries, DSO rose by +2 days on average globally, reaching 66 days at the end of 2017. After five years of stability at 64 days, DSO reached a ten-year high.

Moreover, the spread of DSO around its mean increased in 2017, with one company out of four being paid by its clients within less than 31 days, but one out of four being paid after 90 days. This compares to one out of four companies achieving payment within 88 days in 2016.

The lengthening of DSO reflects a relaxation of payment standards between companies. As global economic health is improving (see above), companies tend to trust their clients to pay them - despite the increase in insolvencies at large corporations’. The increase in average DSO in 2017 stems from a global trend observed in most countries. As shown in chart 2, DSO increased in 2017 in two thirds of the countries in our universe. For the most part, they are developed countries, but some are large emerging economies, such as China and other Asian countries, but also Turkey (+3 days) and Brazil (+1 day). In China where the average DSO already by far exceed the global average, DSO rose by a further +3 days in 2017.

By early 2018, it reached 92 days. It is worth noting that DSO increased in twelve sectors out of eighteen in China, compounded by the share of Chinese companies with DSO that exceeded 90 or even 120 days.

As far as developed countries are concerned, DSO in the US rose by +2 days to a ten-year high (51 days), with almost all sectors contributing to the increase. We also observe a similar trend in Japan (+2 days), Australia (+3 days) and in three-quarters of all countries in Western Europe. In the latter region, there are three distinct groups:

Chart 2 DSO and change in DSO by country

Sources: Bloomberg, Euler Hermes

First, countries with moderate increase, such as France (+2 days, reaching 74 days), Germany (+1 day, reaching 54 days) and Belgium (+1 day, reaching 66 days).

Second, Southern Europe returning with a long-standing habit of lengthy payment periods, while the previous level already exceeded the global average of 66 days: Portugal’s DSO increased by +5 days to 74 days; Spain’s by +3 days to 78 days and that of Greece by +2 days to 89 days on average.

Thirdly, few countries see slowly decreasing DSO, such as Italy where DSO dropped by -2 days to 83 days but still exceed the world average by 17 days.

Chart 3 DSO level and dispersion by country in 2016 (number of days)

Sources: Bloomberg, Euler Hermes

In light of relative levels of DSO (see chart 3), three main groups of countries emerge with respect to the global average:

1. The seven strongest countries have an average DSO inferior or equal to 51 days, the country with the lowest DSO globally being New-Zealand with 43 days. Other countries with short averages are the Nordic countries (Denmark and Finland), Austria and Switzerland, the US and eventually the Netherlands despite the four-day rise due to the strong increases in the telecom, technologies and support services sectors.

2. The group of 7 other countries for which DSO stays below the global average, comprises amongst others Germany (54 days), Canada (54), Brazil (62), and the UK (53) in which it is stable despite uncertainties due to Brexit. We find it noteworthy that Russia is part of the group, with DSO decreasing by +2 days to 56 days, with one quarter of companies being paid under 22 days.

3. Finally, the remaining group of 12 countries with an average DSO superior to the global average of 66 days, such as France (74), Italy (83). China has the highest average DSO (92 days). With respective average DSO of 74 days and 83 days, Portugal and Turkey should be closely monitored as almost one company out of four is paid after four months in these two countries.

We note increasing DSO in almost all sectors while four sectors particularly stand out: Aeronautics (+4 days in 2017, +12 days since 2012), Automotive (respectively +3 and +7), Construction (+3) and Electronics (+3), the sector with the highest a DSO in our universe. There are only four sectors with stable DSO (Food, Household equipment, Machinery, Recreational goods) and two with decreasing DSO y/y (Pharmaceuticals and support Services). DSO is once again far higher in B2B than B2C activities.

The longest DSOs are in sectors with long manufacturing processes, i.e. Aeronautics (72), Automotive (72), Machinery (87) and Electronics (91). DSO in all of these sectors exceeds the global average of 66 days by +6 days or more.

This is also the case for Chemicals, with a DSO of 73 days on average. It is no surprise, as it is a supplier to all industrial activities.

Construction is one of the three sectors with the highest DSO with 85 days: this stems from public works and infrastructures, but also from increasing delays in real estate programs. Not overly surprising given the heterogeneous nature of the sector, there is great divergence around the mean.

DSO in the Energy (63 days), Metals (58) and Paper (62) sectors stand below our global average. However, the metric for the two former ones increased by +3 and +2 days in 2017, respectively, as a consequence of the increase in commodity prices. As for the Paper industry, the +1 day increase to 62 days can be explained by the rise in online sales.

Finally, Pharmaceuticals is the only B2B sector with a decreasing DSO (-2 days) in 2017, albeit still with (78 days), linked to its particular customer base – mainly public health insurance systems.

At the other end of the spectrum are sectors closer to the end consumer, with DSO far lower than the global average of 66 days, such as Food (46 days), Transportation (49) and Household equipment (49).

Chart 4 DSO level and dispersion by sector in 2017 (number of days)



Sources: Bloomberg, Euler Hermes

Chart 5 General heat map for 2017 DSO

Sources: Bloomberg, Euler Hermes Reading notes: Green indicates a low average country or sector DSO; hence a customer base paying faster, and thus greater scope to increase cash. Red color indicates a long country or sector DSO, which can entail working capital risk, especially in case of poor cash balance.