Ask any scientist what part of their work can turn tedium to sublime, and there’s a good chance they will say “the creative part”. Economists are no different.
We like to use our own data, skills and talent to offer the world something unique. This is why we at Euler Hermes’s Economic Research Department get passionate about the Payment Behavior Index – or PBI.
We don’t just think it’s an incredible proprietary index (although it is.) PBI is also a powerful predictor of economic activity, and of financial troubles that might fester under a company’s shiny armor.
In accordance with the American spirit, we launched the pioneer PBI study in the US last year - and update it quarterly. Italy followed suit in early 2016, and we are geared up to explore the topic in other countries.
So why do we believe that a deep dive into companies’ working capital constitutes a powerful tool?
Because the proprietary index creates a neat bridge between past behaviors (such as past due data) and the economy’s future.
Here’s how it works:
With 40 million companies monitored daily worldwide, payment behavior of receivables is an unparalleled way to take the temperature of the private sector and overall growth.
The index is developed using Euler Hermes’ proprietary past due information from policyholders about unpaid accounts receivables.
This in turn provides crucial insights about the vicious circle that leads from Days Sales Outstanding (DSO), through non-payments to insolvencies. So if you have a client or would like to sell to one, it’s crucial that you track its working capital.
PBI also tells quite a lot about the economy as a whole as it highly correlates with GDP growth (e.g. 75% in Italy).
So what did we find on the ground?
In a nutshell, the US’s situation is less positive than what one would expect. And the opposite applies to Italy. Here’s why:
Our proprietary index – for which a value of 50 indicates average payment behavior – has fallen substantially in the US in 2015. It is down 6.4 points from 67.2 to 60.8. This is also consistent with slower GDP growth in Q4 2015 vs. Q4 2014.
The US focused report, titled “Payment Behavior among U.S. Businesses continues to Deteriorate”, shows that financial conditions and shrinking profits contribute to slow payment and bankruptcies. The latter are expected to rise by 3% in 2016 after six straight years of declines.
As for Italy, a presentation our team recently gave in Milano notes that the country’s sluggish recovery does start to feed into better payment behavior.
DSO will remain high at 94 days (2016 forecast), although a mild decline is evident, with the Auto, Agri-food and Retail industries best in class. Another piece of positive news: past dues receivables decreased by -16% in 2015.
As for payment behavior, Textile, Machinery and the Services sectors show improved performance both in domestic and export markets.
And still, not all is well in Italy. The total non-payments picture does continue to brighten up, but the rate of improvement slowed down in 2015 to a total of -7%. The Average cost of a non-payment - EUR17,000 - remains 30% above 2007 levels. And export clients are riskier than others with a typical non-pyament reaching EUR21,000. The Construction and Agri-food sectors suffer from higher non-payment rates both home and abroad.
epending on the sector, you could either tread lightly in Lo Stivale (The Boot) – or begin planning your next move forward.epending on the sector, you could either tread lightly in Lo Stivale (The Boot) – or begin planning your next move forward.
If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages.