According to Johan Geeroms, Director of Risk Underwriting Benelux, European companies are increasingly struggling with the available working capital for their daily business operations. „They are finding it more difficult to obtain credit, and the associated costs have also risen. Add to that the fact that margins are shrinking across the board. Companies are seeking additional flexibility. For example, by delaying payments on invoices. In this way, they use their suppliers as financiers. But if all companies do this, it creates a snowball effect. Payment problems and defaults will occur more frequently as a result.“
Economic growth slowdown
The credit insurer’s research reveals that global working capital requirements have increased for the third consecutive year. Converted into days, this amounted to 76 days of turnover in 2023 (+2 days compared to 2022), driven by weaker economic growth and higher business and financing costs. Despite differences in economic momentum worldwide, the continued rise in the WCR was broadly observed in key economic regions.
Overall, half of the countries in our sample showed an increase in the WCR in 2023, and two out of five countries exceeded the global average, notably France (+5 days) and Germany (+5) in Western Europe, and China (+3 days) and Japan (+3) in Asia-Pacific. The WCR stood at 81 days in Asia-Pacific (+2 days), 69 days in Western Europe (+1 day), and 70 days in North America (+1 day) by the end of 2023.
The biggest leap since 2008
Days Sales Outstanding (DSO) emerged as the main driver of the rising WCR, which increased by +3 days to 59 days in 2023. This is the largest leap since 2008 and nearly double the increase seen in 2022. This implies that an increasing number of companies are waiting longer for their payments, leading to an increased risk of cash flow problems. Globally, by the end of 2023, 42% of companies had payment terms exceeding 60 days of turnover.
In Europe, this share stood at 44%, in line with the global average. In Asia, we observed that 46% of companies exceeded the global average.
In North America, 33% of companies scored below the average. Nevertheless, almost all 22 sectors we monitor globally saw an increase in DSO in 2023.
Due to excess inventory, the WCR rose in transportation equipment (114 days of turnover), electronics (114), and machinery (113), followed by textiles, pharmaceuticals, metals, and chemicals – all with a WCR of more than 90 days.
Decreasing profitability
According to the report, declining profitability in Europe is the main driver for the increasing DSO (more so than financing constraints or cyclical influences). In this context, the slowing global demand in 2024, combined with still high operating costs, could pave the way for further deterioration of payment terms, especially in Europe.
According to Allianz Trade researchers, a decrease in profitability of -1 percentage point could extend invoice payments by over +7 days. With a potential decline in profitability looming in 2024, European companies should brace themselves for longer payment terms. This could increase pressure on cash flows and potentially elevate the risk of non-payment in the region.
Brussels aims to shorten payment terms
Addressing the increasingly delayed payment of invoices is crucial for the resilience of European companies. The proposal from the European Commission could mean that payment terms in Europe are reduced from the current recommended 60 days to 30 days (mandatory). The European Parliament added that the 60-day period could still be possible if contractually agreed upon (and specific goods could have a term of 120 days). Despite this flexibility making the measure less drastic, it significantly restricts the financial flexibility of companies.
According to this research, in the fourth quarter of 2023, 40% of European companies exceeded the 60-day limit for paying their invoices. The new measure burdens many companies with a „financing shortfall.“ This also has significant macroeconomic impacts.
Need for an additional 2 trillion euros in financing
To reduce payment terms to 30 days, European companies would need an additional 2 trillion euros in financing. At current interest rates, this would increase companies‘ interest payments by 100 billion euros. This is equivalent to a margin loss of -2 percentage points. Moreover, overly rigid payment terms could jeopardize the competitiveness of European SMEs by prompting companies to switch to suppliers outside the EU. In this context, policymakers must consider the potential negative effects.
Johan Geeroms concludes on the increasing DSO (Days Sales Outstanding): „Increasingly delayed payments are particularly challenging for SMEs. The customer holds onto money that rightfully belongs to you for longer periods. SMEs lack the flexibility to easily absorb this. It’s also dangerous because delay can turn into default. Many companies are hesitant to pressure their customers, but we know from experience that it’s professional and very wise to proactively respond from the moment the payment term is exceeded. Call the company, ask why payment hasn’t been made yet. Show that you’re not letting grass grow under your feet. This ensures that you’re first in line when payment is made. Every healthy company needs a strict accounts receivable policy.“
Source: Allianz Trade
Photo: Shuterstock
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