3 Caveats with Payment Term Benchmarking David Gustin - August 18, 2015 6:02 AM | Categories: Trade Credit Commentary | Tags: Hackett Group, TermsCheck, working capital benchmarking Trade Financing Matters welcomes this guest article from Brian Shanahan, founder of Informita and Termscheck.com and co-founder of The Working Capital Channel. There are several working capital surveys published every year by large consulting organisations trying to shock you that several hundred billion dollars could be recovered in cash if all quoted companies were in the upper quartile of performance of all of their various studies. The problem is that these surveys are wrong by a significant factor and particularly the global surveys. First, all the data used in these working capital surveys is sourced from publicly available accounting information from companies that are quoted on the world major stock markets. So automatically many large privately held corporations are excluded and many other entities that have co-operative ownership structures. So the surveys are by no means a complete picture of all large companies. Second, the numbers that are published are incorrect. For example if I compare the Day Sales Outstanding (DSO) of a 100% US based company with a 100% EU based company the standard measure of I will automatically not be getting a real picture. In the US there is no VAT, unlike the EU, so even though such survey would tell me that these two companies might have the same DSO, the internal measures of both companies would show a higher DSO for the EU company. In today’s global market there are not many major corporations that have operations in just one country so the fact that companies never have the same geographic footprint mixes things up even more. When trying to compare payables the situation gets even worse. Most of these surveys use the Cost of Goods Sold (COGS) as the denominator for their Days Payable Outstanding (DPO) and Days Inventory Outstanding (DIO) measure. That might be a reasonable for DIO but will be wildly wrong for DPO. The basic problem is that companies do not have to report the value of purchases separately so the surveys then have to pick a denominator that works. The surveyors will argue that it the comparison that matters and not how the measure is calculated. That is so wrong. COGS will include wages, salaries and depreciation on top of third party purchases and will drive down the DPO number compared to a situation where the denominator was purchases only. And this distortion will be different for every company based on the gross margin achieved and the proportion of COGS made up by non-purchased costs. So given all these survey are wrong, what could be a better way to compare the performance of different companies and get a real understanding of the payment terms being offered in the market? You would have thought that big data might have been the answer, but it isn’t. Firstly the major audit firms are a potentially huge source of data. But they can’t use any of it for a non-audit purpose because of the confidentiality agreements they have with their clients. And then there are other operators such as the invoice factoring companies, dynamic discounters and the like who collect vast amounts of data about payment terms. The best any of those have done so far is to publish rather woolly data about the types of payment terms offered in particular procurement categories or in particular countries. From the perspective of a buyer this is interesting information but it doesn’t really hit the nail on the head. What the buyer wants to really know is that if I am dealing with a specific supplier what are realistic terms that I can get with that supplier. So what’s the answer? Enable companies to compare payment terms with real payment term data and help them to understand the real range of payment terms that exist in the market. So isn’t this data governed by data protection laws? The simple answer is that data protection laws only protect data held about individuals, not companies. The key to the database is obtaining the permission of our clients. At TermsCheck.com if you are willing to share your data and have it added to the database then you get a 50% discount on the cost of the service. It is the choice of the client to share or not to share. And the client is always protected so no-one will ever know the data source. In the past three years, we have built up over 750,000 data points from 184 countries and we make sure that none of the data points is more than 4 years old. This service has helped buyers in specific negotiations and has helped a number of clients to validate working capital opportunities before launching into a large program. P.S. If you would like to receive TFM’s weekly digest, sign up here. Related Articles Voices (3) Brian Shanahan: 19.08.2015 at 4:50 am Keith, You make a great point and I would certainly encourage others to do the same. The only problem is that, in my experience, it is common that a company that has a standard term has not deployed that term with more than 50% of their own supplier base. So again checking the companies online terms is a useful exercise but will not give you the entire spread. Reply David Gustin: 18.08.2015 at 5:32 pm Hey Keith, Great point, the challenge is there are about 20,000 middle market companies in the USA and I doubt many of them publish their terms. Also, you have the challenge that IBM Canada and IBM USA may be on different terms, as well as different business units within the company because the inventory turnaround is quite different between divisions. But yes, Google, a very cheap way to source information (but caveat emptor!) David Gustin Reply Keith Murphy: 18.08.2015 at 5:19 pm A simple proxy is to simply Google your supplier’s own standard terms and conditions of purchase, wherein you’ll often find their own standard payment terms with their own suppliers. What’s a better proxy than the own terms your supplier gives to its own vendors? If they don’t at least provide you the same terms they demand from suppliers, then they’re effectively leveraging your balance sheet at your expense. You’d be surprised at how many companies publish their own standard terms of payment online. We keep a running database ourselves without having to use big consulting firms who often aren’t even in front of the purchasing managers or credit managers on the front lines negotiating terms. Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.