Payment terms decline for second consecutive quarter, returning to just above pre-crisis terms
October 12, 2009
The payment terms of Australian firms have declined for the second consecutive quarter, with levels returning to just above pre-crisis terms, according to Dun & Bradstreet (D&B).
D&B’s latest trade payments analysis reveals payment terms have been slashed by three days since the previous quarter and 5.6 days in the past six months.
Terms have now been reduced to 51.8 days, according to more than nine million current accounts receivable records contained on the D&B database.
The analysis reveals that although business-to-business payment terms are at the lowest level since the third quarter 2007, they remain well above standard 30 day terms and continue to detrimentally impact 43 percent of firms.
D&B Director of Corporate Affairs Damian Karmelich argues while the latest data is positive, it is also a clear sign that businesses must maintain their renewed focus on the fundamentals of sound business management.
“Business-to-business payment data is a strong indicator of the cash position of firms as it reveals how current obligations are being paid. Therefore, the latest trade payments data provides a clear indication that the Australian business environment is improving,” Karmelich says.
“Payment days began rising during the September quarter of 2007 when the credit crisis first hit and continued on an upward trajectory for close to two years. The latest results provide the second consecutive quarter of improvement, indicating that the cash position of businesses is strengthening,” he says.
“However, now is not the time for businesses to relax thinking the worst is behind them. Many firms experienced a period of stress because cash flow and credit risk had not been a top priority and they were caught off guard when the global crisis reached our shores.”
According to sector analysis, firms in the forestry, fishing and electric, gas and sanitary services sectors are the only groups to experience deterioration in payment terms.
The forestry sector – which averaged 52.3 days to settle accounts in the September quarter – increased terms 0.2 days quarter-on-quarter however, it improved in year-on-year terms (down 0.6 days).
The fishing sector’s terms rose by 0.7 days quarter-on-quarter, but dropped by 1.4 days year-on-year to average 50.3 days to pay bills.
Meanwhile, the electric, gas and sanitary services sector increased terms by 2.5 days year-on-year despite improving terms by 1.4 days quarter-on-quarter.
This group was also the slowest to pay in the September quarter.
The finance, insurance and real estate sector was the biggest improver, wiping 9.1 days off terms on a year-on-year basis and 7.2 days in quarter-on-quarter terms.
This reduction in terms (to 47.7 days) bumped the agriculture sector out of its position as the fastest paying group.
However, the agriculture sector was not far behind, with payment terms at 47.8 days following improvements of 1.4 and 1.8 days quarter-on-quarter and year-on-year.
These two sectors were the only groups whose average payments terms were under 50 days.
When it comes to business size, small firms (between six and two hundred employees) were the quickest to pay, averaging less than 50 days to settle accounts in the September quarter.
Those with 50-199 employees were the biggest improvers, with their reduction in terms moving them into the quickest paying spot.
This group averaged 48.4 days to settle accounts, an improvement of 5.5 days quarter-on-quarter and 5.3 days year-on-year.
Despite improving terms (to 56 days) by 3 days quarter-on-quarter and 3.5 days year-on-year, big business (500-plus employees) continues to be the slowest paying group, a position it has held for in excess of twelve consecutive quarters.
Firms based in Tasmania and Western Australia were the quickest to pay, with both groups settling accounts in less than 50 days.
Finally, data shows public companies continue to be slower payers than their private counterparts despite reducing payments by 3.7 days quarter-on-quarter and year-on-year to an average of 55.3 days.
Smaller improvements by private firms (3 days quarter-on-quarter and 3.5 days year-on-year) have narrowed the gap between the two groups to 3.6 days, with private firms averaging 51.7 days to pay their bills.
“The credit crisis and its resulting cash crunch made the value of accounts receivable very clear,” Karmelich says.
“As banks tightened their lending books firms tried to squeeze more cash from their day-to-day operations and consequently, many firms are now taking action to collect their bills more quickly,” he says.
“If this renewed focus continues it will allow executives to free up funds for business investment and to pay down debt or rely less on borrowed funds.”