Some insights from Allianz Trade on the tricky task of managing payments and keeping some working capital in reserve. Plus a general outlook summary on the need for trade credit
Allianz Trade releases today its latest report on global Days Sales Outstanding (DSO) and Working Capital Requirements (WCR). In this piece, the world’s leading trade credit insurer takes a look how payments terms and corporate financing needs evolved in 2023, with a global, regional and sectorial approach.
A global and broad-based WCR rise for the third year in a row
Global Working Capital Requirements (WCR) increased for the third consecutive year, reaching 76 days of turnover (+2 days vs 2022), driven by softer economic growth and higher operating and financing costs. Despite differences in momentum, the prolonged rise in WCR remained broad-based across key economic regions.
“Overall, half of the countries in our sample posted an increase in WCR in 2023, and two out of five crossed the global average, notably France (+5 days) and Germany (+5) in Western Europe, and China (+3) and Japan (+3) in APAC. WCR reached 81 days at the end of 2023 in APAC (+2 days), 69 days in Western Europe (+1 day) and 70 days in North America (+1 day). Moreover, 34% of companies recorded WCR exceeding 90 days of turnover as of Q4, compared to 32% and 36% as of Q4 2021 and Q4 2022, respectively”, states Maxime Lemerle, Lead Analyst for insolvency research at Allianz Trade.
How Western Europe differs to the US
Western Europe registered a moderate rise in WCR in 2023 (+1) that, as the US, comforted the trend posted in 2022 (+3). Conversely to the US however, this regional outcome is largely due – despite the seasonal decrease of the end of the period – to the prolonged pressure from inventories (+0.5 day in 2023) after two years of increases (+1 and +2 in 2021 and 2022, respectively), with continuous upside trend observed in the majority of countries, particularly Germany, France and Spain, and the Nordics as exception.
At the same time, changes in payment behaviors remained muted at regional level, with a modest extension in DSO fully offset by a tiny acceleration in DPO. This phenomenon of compensation between changes in DSOs and DPOs, although more or less noticeable, has been seen in most countries, from those marked by extensions (Germany, France, Spain, Belgium) to the rarer ones marked by diminutions (the Netherlands, Sweden, Norway).
At the regional level, WCR represented 69 days of turnover as of Q4 2023, with DSO standing slightly below the global average (56 days i.e. 3 days below). However, European countries continue to post noticeable differences in DSO, with shorter average DSO in Germany, the Netherlands and the Nordics and longer ones in Southern Europe, notably in France, Spain and Italy. Overall, Western Europe records a dispersion of DSO rather close to the global average since 6% of firms are paid in less than 10 days (8% globally) and 41% in more than 60 days (42% globally) – with a noticeably lower proportion of longest DSO than Asia.
Global payment terms: the largest jump since 2008
Days Sales Outstanding (DSO) emerged as the key driver of rising WCR, increasing by +3 days in 2023 to reach 59 days. This is the largest jump since 2008 and almost double the rise in 2022, implying that more companies are waiting longer to get paid, raising the risk of cash-flow issues. Globally, 42% of companies posted payment terms above 60 days of turnover at the end of 2023.
“In Europe this share was in line with the global average, while it was above in Asia (46%) and below in North America (33%). Nevertheless, almost all the 22 sectors we monitor saw rising DSO in 2023. An inventory glut also pushed WCR higher in transport equipment (114 days of turnover), electronics (114) and machinery equipment (113), followed by textiles, pharmaceuticals, metals and chemicals – all with WCR above 90 days”, adds Maxime Lemerle.
The looming profitability squeeze could extend payment delays further
Allianz Trade finds that profitability is the number one driver of payment terms in Europe, more impactful than financing or the business cycle. In this context, slowing global demand in 2024 combined with still-high operating costs could set the stage for a further deterioration in payment terms, especially in Europe.
“We find that a -1pp drop in profitability could increase payment terms by over +7 days. With a profitability squeeze looming in 2024, European corporates should brace for longer payment terms. This could add pressure on cash flows and potentially increase the risk of non-payment in the region”, says Ano Kuhanathan, Head of Corporate Research.
How can the European Union lower payment terms in the region?
Addressing late payments is key to building resilience for European corporates. The European Commission’s proposal for a EU Late Payment regulation suggests that payment terms could be reduced from the current recommended 60 days to 30 days binding. While the European Parliament has incorporated an extension to 60 days if agreed by contract or to 120 days for specific goods, it still brings significantly lesser business flexibility compared to the current terms and is likely to increase the financing gap for more than 40% of European companies paying after more than 60 days as of Q4 2023, resulting in a significant macroeconomic impact.
“To reduce payment terms to 30 days, European companies would need EUR2trn in additional financing. But at current interest rates this would increase corporates’ interest payments by EUR100bn, the equivalent of a -2pps loss of margins. Moreover, too rigid payment terms could put the competitiveness of European SMEs at risk by pushing companies to switch to suppliers outside the EU. In this context, policymakers should factor in the potential adverse effects”, explains Ana Boata, Head of Macroeconomic Research at Allianz Trade.
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