Paying the price for other people's debt

UK business have to make customers settle their bills much quicker, otherwise they are throwing money away, argues Chris Davies

British businesses are some of the slowest payers in Europe, taking an average of 50 to 55 days to settle their bills, according to figures we have compiled at Atradius.

But the UK is not as bad as Italy, where companies regularly take up to 95 days to pay their invoices, making them the slowest payers in Europe. By comparison, Scandinavian countries are very prompt, settling their bills in 25 to 35 days.

Atradius has also found that some industry sectors are better than others at getting their customers to pay up. By far the most successful are firms in the food and retail sector, who have an average Days Sales Outstanding (DSO) of just eight days. By contrast, the automotive industry has to wait the longest for its customers to pay up: an average of 149 DSO.

The low DSO among food retailers compared with automotive manufacturers is caused by the fact that foodstuffs sell considerably quicker than motor vehicles. Therefore, some manufacturers support their dealers with a form of company credit that means they pay for the car only once it is sold.

This underlines the need for every company to have a clear policy on managing their overdue invoices and protecting themselves against bad debts. UK businesses, in particular those trading overseas, have to move from being reactive to become more proactive in chasing up payment and managing their debt collections.

This is important because if businesses eventually get paid, every day that settlement is delayed is money down the drain. All too often, businesses think that as soon as they complete a sale, it is money in the bank. However, if customers take longer than the agreed payment terms to settle their bills, it can impact on a company’s bottom line in lost interest, additional interest payments and charges on their own borrowings.

It also means that companies will have to work much harder to bring in more income to cover the shortfall caused by late-payment. For example, for a company with an annual turnover of £20m, taking the average DSO results in £6,000 of extra interest charges for each additional day (at an 11 per cent interest rate): a bad debt loss of £20,000 will need additional turnover of £500,000 if the company wants to keep a profit margin of four per cent.

UK businesses need to get tough with their credit management. Even if your customers do eventually pay up, that’s no reason to be subsidising their business with your debts.