Irish business is justifiably infamous for its attitude to creditors. Studies show we are the worst in Europe (source: ECB SAFE) and, closer to home, it is quite common for those in business in the Republic to remark on the contrast in attitude to payment in the North or in the UK where businesses are far more likely to stick to payment terms.
In general, the treatment of creditors by all too many Irish businesses ranges from inappropriately casual to entirely cynical. The result is an incredibly destructive cycle where prompt payers are effectively penalised in the form of severe pressure on cash flow.
ISME’s Credit Watch Survey published last December showed that the situation is as chronic as ever, in spite of the introduction of late payment legislation that now enables interest to be charged on late payers (only 3% of SMEs suffering from late payers currently do so). The same survey showed that SMEs are waiting on average 60 days from payment with 24% of SMEs waiting a punishing 120 days before they see funds.
All of this means the credit control function is unlikely to diminish in importance for the foreseeable future – however that importance is frequently undervalues until it is too late. That this is the case is hardly surprising. In many businesses, particularly smaller enterprises, credit control is something hoisted on a (usually reluctant) non-specialist on a part-time basis.
In fact, credit control needs to be approached with an appropriate amount of rigour as it is a key element of cash management.
Effective cash management looks to maximise the availability and application of cash balance while also minimising liquidity risk – the risk that the business will be unable to pay its debts as they fall due. In this respect, timely collections are crucial.
The days sales outstanding (DSO) metric measures the effectiveness of a company’s credit and collections policies. The measure can be applied at a company-wide or individual customer level.
The formula is a follows: (Accounts receivable / Annual revenue) x Number of days in the year.
For example, a company has an accounts receivable balance of €5m with an annual revenue of €30m. Its DSO figure is as follows: (€5m accounts receivable / €30m annual sales) * 365 = 60.8 days.
Everyone in business should understand the DSO metric but to makes things easier StubbsGazette has provided a handy calculator.
There is no universal benchmark to determine definitively good or poor accounts receivable management – it depends on the industry in question, although experience in Ireland seems to be that all sectors tend to gravitate around average 60 days with no obvious outliers according to ISME figures.
Instead, measurement of collections effectiveness should focus on the variance with the company’s credit terms. So, for example, a variance of more than say, 20% abouve the stated credit terms might indicate a tax credit policy.
Nobody goes into business to collect debts: the energy of an enterprise is more productively spent developing product and chasing business rather than chasing cash.
There is much more to credit control than demanding payment. It starts at the invoicing stage: making sure that invoices are complete and accurate and often calling the customer’s accounts payable at an early stage for confirmation that the invoice has been entered into the system. There then needs to be a systematic escalation strategy as debtor days mount.
Tin our experience this is not something many small and medium-sized business want to do or have the resources or expertise to undertake. That is why StubbsGazette is now offering an outsourced Credit Management service to SMEs where they can avail of a centralised, systematic and holistic approach operated at scale.
It is fervently to be hoped that late payers can be persuaded to mend their ways. In this respect, information is critical. Consequently, StubbsGazette has its own internal Late Payment Register. This takes information data our Debt Collections unit on late payers and feeds it into our Credit Bureau.
Consistently late payment is a firm indicator of default probability and so we therefore modify our credit bureau scores accordingly for those appearing on the register. Ironically, the means to out late payers lies within the business community. At StubbsGazette we are hopeful that pooling of data among suppliers can effectively identify reluctant payers and by “naming and shaming” and hopefully modify their behaviour. We intend to publish these consistent late payers in StubbsGazette and we invite any business suffering from this scourge to contact us.