DSO Decline Signals Increased Caution
Wednesday, May 15, 2019
According to an annual review and forecast by Euler Hermes, global average Days Sales Outstanding fell by -1 day to 65 days in 2018, a sign of companies becoming more cautious in line with the global economic slowdown. As world GDP growth slows further this year, Euler Hermes expects DSO to reach 64 days in 2019.
In 2017, the reacceleration of world economic growth led to a noticeable rise in global average DSO, which reached its highest level since 2007 at 66 days. Companies placed greater trust in customers due to a better economic and financial background.
However, 2018 was marked by global uncertainty, which is expected to lead to a deceleration of global growth in 2019 to 2.9% year over year, according to Euler Hermes, compared with 3.1% year over year in 2018. Worried companies are tightening their credit conditions. As a result, DSO is likely to continue its downward trend to hit 64 days on average in 2019.
China once again recorded the longest average payment term in the world at 92 days (+27 days above the global average), despite reducing its DSO (by -1 day in 2018 vs. 2017). This reflects the role of Chinese companies as “invisible banks” at a domestic level and for major trade partners, which is consistent with a less mature and less open financial system. But this is dangerous: It makes Chinese companies more fragile.
Despite usually having levels structurally lower than the rest of the world, in 2018, Canada and the U. S. still managed to reduce their DSO to 52 days and 51 days, respectively. This reflects cultural preferences but also shows that cash-rich companies in these countries can adapt rapidly to changing trends in global growth. In spite of weakening economic conditions, Norway (53 days), Sweden (57 days), the UK (52 days), Germany (54 days), Poland (59 days) and Belgium (59 days) all managed to lower their DSO, anticipating an upcoming deceleration of growth and adapting to rising difficulties in the car industry.
Mediterranean countries are a case for concern Mediterranean countries are lagging behind, including Greece (91 days), Italy (86 days), Morocco (84 days), Turkey (79 days), Spain (78 days) and France (73 days), where companies are back in the bad habit of getting paid late by their customers. “
B2C industries have a higher capacity, compared with B2B, to impose new terms of payments when needed. So they are more likely to grant longer terms of payments for commercial reasons if they consider the cycle as not being too deteriorated. Indeed, in a macroeconomic perspective, as we are in a late phase of the cycle, and as they are exposed with a delay to economic fluctuations, B2C companies can be incited to continue proposing laxer terms of payment.
B2B industries are more directly and in an earlier manner impacted by the fluctuation of the economic cycle. They are more cyclical by nature. They have already observed a global deceleration of growth, meaning upcoming economic hardship; as a result, companies fearful of being paid too late shortened their DSO in 2018.
Although it shows the lowest DSO level compared to all other sectors (30 days), retail must be watched carefully, as its DSO plummeted by -5 days on average last year. As the sector’s business model is turning upside down, it has strongly tightened up its overdraft facilities. Upstream sectors could be affected if retailers were to also increase their own Days Payable Outstanding (DPO).
The review and forecast is based on a sample of 25,000 listed companies across 20 sectors and 36 countries.