Spanish and Italian companies are the worst at paying their bills. But that doesn’t seem to matter much: they’re also the worst at collecting on their invoices. So what goes around (or doesn’t) comes around (or doesn’t).
Those truths are supported by the findings of a working capital survey comparing 925 companies for fiscal years 2010 and 2011 recently released by consulting firm REL. In Italy average days’ sales outstanding (DSO) was 76 in 2011, though that’s an improvement from 83 the previous year. In Spain DSO was 69 in 2011, down from 76. On the payables side, the figures for 2011 match almost exactly: 77 days’ payable outstanding (DPO) in Italy, 69 in Spain.
(As defined by REL, DSO is year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue. A decrease in DSO represents an improvement, an increase a deterioration. DPO is year-end trade payables divided by one day of average revenue. An increase in DPO is an improvement, a decrease a deterioration.)
“There’s no getting away from it,” says Gavin Swindell, European managing director of REL. “Italy and Spain are significantly higher than the rest of the major European countries [at being paid and paying] — and they’ve always been. They stay like that.”
Germany and Scandinavia, however, “are an order of magnitude lower.” For Germany, DSO is 51 and DPO is 36, so they’re better at paying their bills than they are at collecting. In Scandinavian countries, DSO is about 50 with DPO a few days either side of 30, depending on the country.
For Italy and Spain, though, the net effect, after allowing for inventories, leaves them with better days working capital (DWC) positions — 37 and 26, respectively — than Germany (65), the United Kingdom (38), or Sweden (74). (REL defines DWC as accounts receivable + inventory – accounts payable/total revenue/365. The lower the number of days, the better.)
Perhaps that’s good fortune rather than good management — or maybe it’s just a whole different attitude that actually works out better: one person’s payables are another person’s receivables, after all.
In Swindell’s experience, supported by the data, working capital management in Italy and Spain is “significantly less of a priority,” he says. “I think it’s the way their business community operates. It comes back to culture. They’re probably less driven by the markets.”
The populations of those two countries appear to have the attitude that “We don’t care what the stock market says we should be doing in the short term; we do the right thing economically for the long term,” he adds.
In these countries, “business relationships are paramount, so companies are reticent to push on collections. The assumption is that clients and customers will pay their bills eventually,” says Swindell. “If everybody plays by those rules, the system works. I can pay my suppliers later because my customer is paying me later.” It is, he agrees, less efficient, and it certainly ties up more working capital, but this system does work.
Being aware of the differences in payments culture is not just a statistical curiosity: it’s something that companies need to be aware of, not only when dealing with customers and suppliers but also within their own groups.
As shared service centers and outsourcing become increasingly predominant, CFOs need to be aware of the impact these can have on working capital management and, more importantly, customer management. “You tend to make key processes more elongated geographically and communicatively” by centralizing payments and collections, Swindell says.
“In our projects, it used to be just about helping different functions work together. But now a lot of it is about helping different functions that are driven by different cultures and different values,” he notes.
One emerging issue that will affect these cultural differences is a new European Union law on late payment. The Late Payment Directive came into effect in 2011 and requires all 27 EU member states to, in effect, adopt the terms of this law by passing their own legislation by mid-March 2013.
The new law will mean:
- Payment terms will not be allowed to exceed 60 days unless expressly written into contracts and provided those contract terms are not “grossly unfair” to the creditor.
- If there are no agreed terms, then the payment terms will be deemed to be 30 days.
- Creditors can be paid interest for late payment. In the euro zone, the rate is 7% above the European Central Bank’s rate.
Antonio Tajani, vice president of the European Commission responsible for industry and entrepreneurship, is urging EU countries to enact the necessary legislation as soon as possible — not least because the new law will also be binding on governments.
In a recent speech, he said, “I believe it is a moral duty, and not only a legal obligation, that public administration be timely in paying their debts towards companies.” This, he said, would “unlock” €180 billion worth of payments to European businesses. “Thousands of companies’ going bankrupt could then be avoided without further loss of jobs and with a positive impact on public finance itself.”
Expect those increasingly prompt payment terms in Southern European countries to carry on trending downward. There’s still some way to go before they get below 60 days.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.