The Challenge of Late-paying B2B Customers: an Action Plan

No business is immune to the challenges of late-paying customers. But in today’s widely experienced business climate of softer economic growth and higher operating and financing costs, those challenges loom large – and can’t be ignored.

According to a global study by Allianz Trade, average days sales outstanding (DSO) – the classic metric tracking the lag between sales and payments – rose by three days in 2023 to hit 59 days, with one in five companies having to wait more than 90 days for a typical invoice to be honored.

That DSO trend is both frustrating and risky for companies. For one, it pushes up the working capital requirements (WCR) of businesses as they cope with the widening payments chasm. Globally, WCR increased for the third consecutive year, reaching 76 days of turnover in the fourth quarter of 2023, following the largest annual jump since 2008. For a third of companies, it exceeded 90 days.

The increase in WCR worldwide is hardly benign. The combination of stretched cash flow and weaker sales opportunities will be, in many cases, a trigger for insolvency. Indeed, mid-2024 data from Allianz Trade’s Economic Research team suggests global insolvencies will increase by 10%+ during 2024, with the emergence of some surprising hotspots: Germany should see a +21% increase, Italy +18%, France +12% and Belgium +11%.

With a squeeze on profitability setting the stage for payment timescales to deteriorate further, businesses need to identify opportunities to bolster their cash flow, control high DSO, and insulate their operations from buyers who are getting into trouble.

The Allianz Trade report points to several safeguarding options that can help to address the challenges of late payments, but three stand out:

1. Eyeball your customers
As every business knows, not every customer is a good payer. When you are extending credit to buyers in a tougher marketplace, it makes sense to be judicious about who you do business with and apply suitable levels of due diligence. Longitudinal research by Allianz Trade shows that the determining factor for a buyer paying on time (or, indeed, at all) is their profitability (i.e. gross margin). In fact, researchers found that a single percentage point drop in a company’s profitability typically increases payment terms by more than seven days. With profitability likely to be squeezed in 2024 in many economies, corporates should be readying themselves for longer payment terms and closer scrutiny of profit and loss accounts by keeping a close eye on their buyers’ activity.

2. Understand sector risks
The sector you are dealing with or active in is going to influence expectations around payment. At the end of 2023, WCR for transport equipment stood at a colossal 114 days of turnover, ranking the highest alongside electronics (114), and machinery equipment (113), although other sectors such as textiles, pharmaceuticals, and metals were not too far behind, all living with 95+ days. The takeaway: involvement in some sectors demands a much sharper focus on cash collection and cash flow protection than others. To stay informed on the health of different sectors, it’s worth accessing Allianz Trade's proprietary sector risk reports, which track the statuses of 17 industries globally.

3. Pick your export destinations with care
Payment cultures vary considerably across the globe. In Europe, 41% of companies posted payment terms above 60 days of turnover at the end of 2023, in line with the global average (42%). But in Asia that figure was a heftier 46%, while in North America it was a less troublesome 33%. DSO in Q4 of 2023 stood at 49 days in the US/41 days in Canada. The diverse picture suggests that companies need to line up suitable protection solutions, such as trade credit insurance, when trading with countries where DSO, WCR, and the risk of buyer insolvency is running high. A useful decision-making aid in that monitoring process is Trade Match, Allianz Trade’s online tool that highlights the export risks and opportunities in 70 markets and 18 sectors around the world.