In the first part of this series, I relayed a series of conversations and emails I've had with D&B's Jim Lawton. In the second part, I'd like to drill down on a specific area that often gets overlooked as a supply risk factor. And that is days payables outstanding (or days receivables outstanding if you're looking at it from a supplier's perspective). Why does this matter in the context of supply risk? In good times, the longer the amount of time a company stretches payment out past the agreed upon payment terms -- or simply stretches its payment terms beyond past levels -- the more likely suppliers are to feel cash flow pressure.
If a supplier is under-capitalized, as are so many smaller companies, and its customers stretch payables, it forces the supplier to seek alternative supplies of capital to meet their customer's demand expectations. These sources might take the form of a traditional bank letter or line of credit. Or they might take the form of raising additional funds in the capital markets through private or public debt or equity offerings. As a last resort, a supplier might turn to a non-traditional lender, a factor, who they might attempt to sell their receivables to at some type of loan-shark interest level. It's worth noting, though, that some companies forbid the selling of supplier receivables to a third party.
So in good times, this type of situation leaves our under-capitalized supplier hurting. But in times when the economy is down, banks are making it difficult to borrow and when order sizes are shrinking, it can leave suppliers desperate. This is the perfect storm that is brewing at the moment from a day's payable outstanding perspective. According to D&B as of early October -- before the impact of the full downturn hit us -- the average amounts past due had risen by industry between the high single and low double digits compared with 2007. You can be sure that as of November, these numbers have increased further.
By country, past due amounts look even more interesting. Where are the worst buyers when it comes to payment (and the most desperate suppliers)? The countries with the highest percentage of payments 30 days + agreed upon terms are spread out across the globe. But some really stand out. In the UAE, nearly 42% of payments are 30 days plus agreed upon terms (one wonders if the boom/bust construction cycle there has had anything to do with this). In Bolivia, the number is 44.2% and in Costa Rica, 41.6%. In Guatemala, the number rises to 48.6% which sounds high but is nothing relative to Nicaragua’s 65.3% amount. China is relatively low at 23.6% but in India, this number rises to 52.1%. But when it comes to late payments, there's only one turkey, which, you guessed it, is Turkey. In Turkey, 76.6% of payments are 30 days plus the agreed upon terms.
So don't be a Turkey. But if you do business in the region, it might be a good bargaining chip with suppliers to offer them highly favorable payment terms in return for sharpening their pencils. After all, it's clear they need the cash!